Optimal Income Taxation with Risky Earnings: A Synthesis

We study optimal nonlinear income taxation when earnings can differ because of both ability and luck, so the income tax has both a redistributive role and an insurance role. A substantial literature on optimal redistribution in the absence of risk has evolved since Mirrlees's original contribution. The literature on the income tax as a social insurance device is more limited. It has largely assumed that households are ex ante identical so unequal earnings are due to risk alone. We provide a general treatment of the optimal income tax under risk when households differ in ability. We characterize optimal marginal tax rates and interpret them in terms of redistribution, insurance, and incentive effects. The case of ex ante identical households and the no‐risk case with heterogeneous abilities come out as special cases.     

The Income Splitting Method: Is it Good for Both Marriage Partners?

Abstract. This paper analyzes how deviating from individual taxation affects married couples. The focus is on time allocation, on investment in family‐specific human capital and on distribution of income within the family. Two insights are discussed in detail. First, the distribution of tax‐reduction gains due to the income splitting system depends on whether the family has been started or not. After marriage, joint taxation increases redistribution among family members. Second, although joint taxation reduces the tax burden of the family, it might harm the marriage partner that is more productive in household production provided that potential marriage partners foresee the effects of joint filing on the time allocation within the family.     

个人所得税的累进性与再分配效应——以湖北省为例

以湖北省城镇调查数据为分析对象,以指数为工具,本文实证考察了我国个人所得税的累进性及再分配效应。得到的结论是我国个人所得税再分配效应很弱,但其原因并不在于税收的实际累进性小,而在于个人所得税的平均税率低,税收规模很小。同时,在各类收入中,工资性收入的个人所得税累进性很强,经营性收入及财产性收入的个人所得税累进性较差,甚至出现累退性。提高个人所得税规模、加强对经营性收入及财产性收入的税收征管、以家庭为单位征收是个人所得税进一步改革的方向。     

Income splitting among the self-employed

Abstract .  Under individual taxation with progressive marginal tax rates, households in which the distribution of income is unequal benefit from attributing income to the lower income household member. Self-employment provides greater potential to 'split' income in this way because of the absence of a third party reporting income. Using the Canadian experience as a case study, this paper develops a unique estimator of the incidence of illegal income splitting among self-employed couples. The results suggest that the incidence of income splitting among self-employed men in Canada is non-trivial; but no evidence is found that self-employed women attribute income to their spouses.     

Does Work Always Pay in Germany?

Abstract. Income redistribution in Germany is the result of a combination of several redistribution instruments: there is a complex income tax law, different obligatory social insurances and supplementary benefits. This paper estimates income redistribution by quantile regression, using German EVS data. Two results are obtained: income after redistribution does not always increase in line with income before redistribution, i.e. for people with a low income before redistribution, it does not make sense to increase their efforts, since more work means less earnings. Further, an increasing redistribution rate for higher incomes is not always observable from the data.     

关于收入分配若干问题探析

在经济快速发展的同时,我国居民收入分配格局发生重大变化,收入分配不公的问题日益凸显。特别是新世纪以来,收入分配差距急剧拉大,收入分配不公已成为制约我国社会和谐稳定以及经济持续发展的突出问题。面对我国日趋严峻的收入分配不公现象,有许多问题值得深入分析和思考。收入差据拉大不能简单等同于收入分配不公,导致收入差距不断拉大的原因比差距拉大本身更值得关注;我国的收入分配不公以不同的形式表现在初次分配环节和再分配环节,初次分配环节的严重不公制约了再分配的公平。制约税收调节收入差距不力的因素不仅仅限于税收的立法与执法,而是有更深刻的根源。行政垄断、腐败等原因形成的收入差距税收杠杆是无效或低效的,政府收入不规范导致税收的公平分配力度偏弱。     

我国个人所得税的再分配效应分解分析——以我国中部某地区为样本

本文以2007年我国中部地区某市工资收入和纳税情况为样本,采用修正的AJL分解法,对工资薪金所得税的再分配效应进行分解,揭示了税收再分配效应的损失,为改革和完善我国个人所得税制提供了现实依据。结果表明:工资薪金所得税的再分配效应损失为2.7%,其中水平不平等效应和再排序效应产生的损失分别为0.18%和2.51%;群体内再排序效应、群体间再排序效应以及AJL再排序效应占再排序效应的比重分别为70.55%、1.11%和28.33%。虽然该市工资薪金所得税再分配效应的损失相对较小,但从全国范围的个人所得税来看,可以预期税收再分配效应损失是较大的。     

On The Distributional Effects Of Reducing Capital Taxes*

This article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes. We compare a representative‐agent economy to an economy in which households face idiosyncratic uninsurable income risk. The income process is consistent with empirical estimates and implies a realistic wealth distribution. We find that capital tax cuts imply large welfare gains in the representative‐agent economy. However, when households are heterogeneous, substantial redistribution during transition means that only a minority will support capital tax cuts, whereas most households can expect large welfare losses.     

Is money where the fun ends? Material interests and individuals’ preference for direct democracy

Are people’s attitudes towards referendums as a decision-making procedure predominantly driven by their material self-interest, or do individuals also value direct democracy as such, regardless of the material payoffs associated with anticipated policy outcomes? To answer this question, we use a survey data set that offers information on respondents’ support for referendums as a procedure to decide on tax policy, their income levels, socio-economic characteristics, and, most importantly, their expectation about the majority’s support for higher taxes. We find that the support of low-income individuals for referendums increases substantially if they expect a clear population majority in favor of more redistribution. Conversely, individuals with a high income who expect a majority in favor of higher taxes do not reject referendums more strongly than individuals with an average income who share these expectations.     

Fairness in tax compliance: A political competition model

This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two‐stage model where there is a two‐party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle‐income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.     

Impact of Taxes and Benefits on Inequality among Groups of Income Units

This paper analyzes the redistributive impact of the fiscal system and simultaneously explains how each tax and benefit instrument satisfies the principles of vertical and horizontal equity within and across different groups of income units. The decompositions of the redistributive effect are based on new axioms concerning the vertical and horizontal equity of the overall fiscal system, including taxes and benefits. The method is based on pairwise comparisons of income units and the “micro” concepts of income supremacy change, deprivation from reranking, and income distance change. The decomposition results provide more detailed insights into the income redistribution process than is typical in the literature. This is illustrated by an empirical application of the method to the Croatian scheme of personal income taxes and non‐pension social benefits, in which households are divided into two groups, those with and those without children.     

Strategic Tax Competition in Switzerland: Evidence from a Panel of the Swiss Cantons

Abstract. Tax competition is discussed as a source of inefficiency in international taxation and in fiscal federalism. Two preconditions for the existence of such effects of tax competition are that mobile factors locate or reside in jurisdictions with – ceteris paribus – lower tax rates, and that taxes are actually set strategically in order to attract mobile production factors. It is well known from studies about Swiss cantonal and local income tax competition that Swiss taxpayers reside where income taxes are low. In this paper, empirical results on strategic tax setting by cantonal governments are presented for a panel of the Swiss cantons from 1984 to 1999. Completing the evidence on Swiss tax competition, income tax rates in cantons are the lower, the lower the tax rates of their neighbors.     

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.     

Inequality in democracies: Testing the classic democratic theory of redistribution

The classic democratic theory of redistribution claims that an increase in the mean-to-median (MM) income ratio causes a majority coalition in the electorate to collectively demand more redistribution. The functional dependence of redistribution on the MM income ratio is tested in parametric and nonparametric regression frameworks using an OECD panel dataset. While the parametric regression model is found to be misspecified rendering subsequent inference invalid, the robust nonparametric regression model fails to uncover evidence that the MM income ratio is relevant for predicting redistribution.     

Wealth Inequality in Sweden: What can we Learn from Capitalized Income Tax Data?

This paper presents new estimates of wealth inequality in Sweden during 2000–2012, linking wealth register data up to 2007 and individually capitalized wealth based on income and property tax registers for the period thereafter when a repeal of the wealth tax stopped the collection of individual wealth statistics. We find that wealth inequality increased after 2007 and that more unequal bank holdings and housing appear to be important drivers. We also evaluate the performance of the capitalization method by contrasting its estimates and their dispersion with observed stocks in register data up to 2007. The goodness‐of‐fit varies tremendously across assets and we conclude that although capitalized wealth estimates may well approximate overall inequality levels and trends, they are highly sensitive to assumptions and the quality of the underlying data sources.     

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.     

The political economy of contributive pensions in developing countries

This paper sheds light on the role of public institutions as a way to reduce tax evasion through a close link between payroll taxation and pension benefits. We use a political economy model in which agents have the possibility to hide part of their earnings in order to avoid taxation and, where the public system is more efficient in providing annuitized pension benefits than the private sector. We show that in the absence of evasion costs, agents are indifferent to the tax rate level as they can always perfectly adapt compliance so as to face their preferred effective tax rate. There is unanimity in favour of the maximum tax rate and, the public pension system is found to be partially contributive in order to increase tax compliance and thus the resources collected. This, in turn, enables higher redistribution toward the worst-off agents. When evasion costs are introduced, perfect substitutability between compliance and taxation breaks down. At the majority-voting equilibrium, individuals at the bottom of the income distribution who are in favour of more redistribution, and those at the top who want to transfer more resources to the old age, form a coalition against middle-income agents, in favour of high tax rates. In addition to the previous tax base argument, the optimal level of the Bismarkian pillar is now chosen so as to account for political support.     

Property taxation as incentive for cost control: Empirical evidence for utility services in Norway

Recent theoretical research suggests that property taxation has incentive effects that can help control cost problems in the public sector. The institutional setting in Norway allows this first empirical investigation of the incentive effect of property taxation, since we can separate between local governments with and without property tax. The raw data of the variation in the unit cost level for utilities show that local governments with property tax have 20% lower unit cost. Using both linear regression and propensity score matching, we are not able to wash out the difference in unit costs. Our interpretation is that having a visible and controversial local tax related to property stimulates voter interest in local government activities and thereby may help cost control.     

Income distribution,fiscal policy,and delays in stabilization

This paper presents an explanation of the cycles of large fiscal expansions and macroeconomic stabilizations that are frequently observed in developing countries. In the model, different coalitions form and change depending on the position of three groups over the degree of redistribution and the timing of debt repayment. I show that seemingly unsustainable fiscal policies arise from a coalition of the poor and the rich when the distribution of income is highly unequal. When income is distributed more equally, instead, the patterns of fiscal policy and of the trade balance are consistent with the standard predictions of representative agent models. These features of the model seem consistent with available empirical evidence.     

Feasible Net Income Distributions under Income Tax Evasion: An Equilibrium Analysis

We investigate how redistribution of income is affected by the fact that income is privately observed and agents may not be truthful in their reports to tax authorities. In response, the government establishes an audit mechanism with penalties. Adhering to a signaling equilibrium concept, we prove that agents resort to mixed strategies, which makes it difficult for tax authorities to identify the true types. The audit strategy has a cutoff property: All income declarations below the pivotal income are audited with a constant probability; other declarations are not audited. In spite of not necessarily being truthful, agents whose true income is below or equal to the pivotal income pay their liability and, consequently, the government is implementing the designated tax schedule for those agents. In equilibrium, penalties and tax corrections equal the audit cost. Consequently, the audit system does not contribute directly to revenues, and its role is restricted to supporting the equilibrium.