Optimal labor income taxation in a two-sector dynamic general equilibrium model

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive.     

Optimal income taxation with a stationarity constraint in a dynamic stochastic economy

We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space that incorporates type evolution. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it only applies to the top of the expanded type space. If the maximal type increases over time, the person with top ability in any period but the last has a positive marginal tax rate.     

Incentive generating state dependent penalty system: The case of income tax evasion

Penalty systems can very often be looked upon as corrective measures established in order to eliminate or reduce costly externalities generated by optimizing economic agents. Hence, penalties can be viewed as regulatory measures and their efficient structure should be of interest to economists. We propose a dynamic incentive generating penalty system which, if instituted, may reduce, at a given cost, the generation of undesirable externalities. The special case to which we refer is income tax evasion, although our scheme should be applicable to any kind of externalities, such as pollution of the environment, violation of antirust laws and others which are created by repititive actions of economic agents.     

Revenue-maximizing tax rates in personal income taxation in the presence of consumption taxes: a note

This article computes revenue-maximizing tax rates in personal income taxes in the presence of consumption taxes. It finds that the traditional Laffer analysis, which neglects the effects of marginal tax rates on consumption, overestimates the magnitude of revenue-maximizing tax rates. The bias caused by this oversight is computed.     

The taxation of capital income in an open economy: the importance of resident-nonresident tax treatment

The authors develop a simulation model of the United States and the rest of the world to demonstrate how international capital mobility alters the incidence and capital formation incentives of taxes on capital income. The model explicitly recognizes that U.S. and foreign investors hold a different mix of assets in each country. Only a modest degree of international mobility is necessary to substantially alter closed-economy patterns of tax incidence. Differences in the tax treatment of residents and foreigners are particularly important in evaluating tax reductions at the individual level or the integration of corporate and individual income taxes.     

The dynamic welfare cost of seignorage tax and consumption tax in a neoclassical growth model with a cash-in-advance constraint

Using a public finance approach, this study investigates welfare costs between seignorage and consumption taxes in a standard growth model. One of these two taxes is used to finance exogenous public spending to balance the government budget. The steady-state welfare cost of consumption taxes is lower if the consumption effect dominates the leisure effect. This paper compares equilibrium along transitional dynamic and steady-state paths and finds that because of lower consumption and leisure and thus higher welfare costs of consumption taxes during early periods, the welfare cost of consumption taxes is larger than the welfare cost of seignorage taxes.     

The effect of marginal tax rates on taxable income: a panel study of the 1988 tax flattening in Canada

Federal tax reform in 1988 flattened the Canadian personal income tax schedule, changing the marginal tax rates for many individuals. Using methods similar to those applied by Auten and Carroll [Rev. Econ. 81(4) (1999) 681] in the study of the effects of the 1986 U.S. Tax Reform Act, we estimate the responsiveness of income to changes in taxes to be substantially smaller in Canada. However we find evidence of a much higher response in self-employment income, in the labor income of seniors and from those with high incomes.     

Development and income distribution in a dual economy: A dynamic simulation model for Zambia

This paper discusses medium-term development prospects for Zambia. The analysis is carried out in terms of a modified dual economy model, suitably modified to capture a number of key aspects of the Zambian Economy. Mining is separated from other urban production and the rural sector is sub-divided into traditional, emergent, and commercial farming. Simulations are carried out on the basis of alternative governmental expenditure, investment, and taxation policies. Special attention is paid to sectoral employment and income distribution implications. In addition, the model is used to derive a number of shadow prices which would be used for project appraisal. These include the shadow price of government savings and a social discount rate.     

Specialization in a dynamic trade model: An overlapping generations case

Abstract

We explore a small open economy with overlapping generations to show that demographic structure is an important factor for the determination of a production pattern in the dynamic trade theory. In the representative agent model, Baxter (1992) shows that even if there are two commodities and two production factors, there is a Ricardian implication that opening up to trade leads to perfect specialization in a small open economy. In contrast, using the overlapping generations model, we find that the heterogeneity of the economic agents generally makes imperfect specialization occur. We also find that whether the stability condition holds or not is crucial for the determination of the long-run production pattern.     

Public infrastructure and trade in a dynamic two‐country model

We develop a two‐country dynamic trade model with public infrastructure having an “unpaid‐factor”‐type positive externality on private sectors’ productivity. With welfare‐maximizing national governments making infrastructure investment, we show that a country with a smaller labor endowment, a lower depreciation rate of infrastructure, and/or a lower time preference rate will become an exporter of a good that is more dependent on infrastructure and will gain from trade, whereas its trading partner may lose from trade. We consider both the nonstrategic governments case and the case of strategic governments that recognize the effect on the terms of trade.     

Income tax incidence in a developing country: The case of Greece

The objective of this study is to throw some light on the question of direct tax incidence in a developing country like Greece. A two-sector model is built up which emphasises a number of duality aspects. In that respect the model deviates from the standard Harberger type models. Appropriate shifting formulas are then constructed. Making use of a set of plausible parameter values our findings suggest that the taxed input may avoid some portion of the tax burden even under a perfectly competitive environment.     

A dynamic CGE model for jointly accounting ageing population,automation and environmental tax reform. European Union as a case study

We develop a dynamic Computable General Equilibrium model based on the combination of different versions of GTAP utilities where alternative scenarios on ageing population trends are combined with projections on the incidence of automation into production processes and the adoption of unilateral decarbonisation policies. By simultaneously controlling for these different challenges that especially developed countries should face in the next decades, it is possible to disentangle non-linear mechanisms that will influence sustainability of public budget when the three issues are jointly combined. The European Union is taken as a case study. The first result is that ageing trends will impact fiscal sustainability reducing the EU capacity to respect the Stability and Growth Pact parameters. Second, when also considering technical change related to automation and robotics in the production process, fiscal sustainability will improve only in the case of input-neutral technological change. On the contrary, if biased technical change produces unemployment impact, negative impacts of ageing population are reinforced by automation. Third, the adoption of an environmental tax, here modelled in the form of a carbon price, leads to an improvement in environmental sustainability but has non-linear effects of fiscal sustainability.     

Interpreting income distributions in a welfare state: The case of Sweden

It is shown in this paper that the distribution of purchasing power, and hence probably also ‘economic well-being’, in a Welfare State like Sweden is not tightly connected with the contribution of households in the production system. Moreover, economic inequality is drastically exaggerated when income statistics are not adjusted for differences in working time and in the time-profile of income over life. However, it is also shown that some important inequalities are not removed even by the very ambitious tax and Welfare State system in Sweden, and that some new inequalities are in fact introduced. The paper also tries to highlight the wide wedges which in an ‘advanced’ Welfare State are necessarily driven between factor costs for firms and factor rewards for households. All this holds in particular for annual income.     

Optimal private good allocation: The case for a balanced budget

In an independent private value auction environment, we are interested in strategy-proof mechanisms that maximize the agents' residual surplus, that is, the utility derived from the physical allocation minus transfers accruing to an external entity. We find that, under the assumption of an increasing hazard rate of type distributions, an optimal deterministic mechanism never extracts any net payments from the agents, that is, it will be budget-balanced. Specifically, optimal mechanisms have a simple “posted price” or “option” form. In the bilateral trade environment, we obtain optimality of posted price mechanisms without any assumption on type distributions.     

Consequences of a tax on the brain drain for unemployment and income inequality in less developed countries

Welfare implications of an income tax paid by emigrant skilled workers are analyzed in a model which assumes international capital mobility and allows for unemployed labor in the modern sector of a developing country. The tax discourages overinvestment in education and also contributes to the welfare of those remaining through the direct revenue effect. However, expected earnings of unskilled workers decline as a result of the tax, while those of non-migrant skilled workers rise. The tax may thus exacerbate domestic income inequality. In addition, modern sector employment, output, and capital stock may fall.     

The dynamic of innovation networks: a switching model on technological change

In this paper, we introduce an agent-based model where heterogeneous firms compare and modify their innovation strategies, so generating an evolving network structure. By implementing dynamic behavioral switching via a fitness mechanism based on agents’ performance, companies can endogenously modify their tactics for technological change and switch among three groups: stand-alone innovators, collaborative innovators and imitators. On the one hand, we study the properties of the emerging networks and we show that they reproduce the stylized facts of innovation networks. Moreover, we focus the analysis on the impact of these three innovation categories on the macro economic aggregate, finding that collaborative companies are those having the highest positive impact on the economic system. On the other hand, we use the model to study the effect of different economic innovation policies in increasing macroeconomic performance.     

The end of the flat tax experiment in Slovakia: An evaluation using behavioural microsimulation in a dynamic macroeconomic framework

The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. In the approach presented in this paper, income heterogeneity interacts with the macro-economy via aggregated individual labour supply decisions which influence, and are influenced by, the dynamic evolution of the real wage rate. The method involves a reduced-form representation of the information flow between the macroeconomic and microeconomic blocks. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms that involve abandoning the flat tax system in Slovakia. A hypothetical move to a highly progressive tax structure is shown to generate some employment gains but is associated with a drop in aggregate income and tax revenue.     

The effects of economic freedom,regulatory quality and taxation on the level of per capita real income: a preliminary analysis for OECD nations and non-G8 OECD nations

This study of the impact of economic freedom, regulatory quality and the relative burden of taxation on the level of per capita real income/GDP among OECD nations over the period 2003 to 2007 adopts a modified version of the overall economic freedom index computed by the Heritage Foundation (2013), one with the fiscal freedom and business freedom indices removed. This study then provides panel least squares fixed-effects estimates for five linear specifications/models. Each nation during this time frame can be regarded either as a nation per se or as a de facto ‘economic region’ within the OECD. The analysis first focuses upon all of the OECD nations and then, as a robustness test, subsequently focuses only on non-G8 OECD member nations. The estimations in this study all provide strong empirical support for the three central hypotheses proffered here, namely: (1) the higher the overall degree of economic freedom, the higher the per capita real income (GDP) level; (2) the higher the level of regulatory quality, the higher the level of per capita real income (GDP) and (3) the higher the overall tax burden, expressed as a per cent of GDP, the lower is the level of per capita real income (GDP).