Ramsey,Pigou, Heterogeneous Agents,and Nonatmospheric Consumption Externalities

This paper analyzes the effects of nonatmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second‐best level of public good provision to exceed the first‐best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, the second‐best commodity tax rate may fall short of the first‐best rate. Moreover, in this case, heterogeneity may imply an equity‐efficiency tradeoff. This tradeoff is present only if the consumption externality is of the nonatmospheric type.     

Subsidies versus Public Provision of Private Goods as Instruments for Redistribution

The literatures on differential commodity taxes and on quantity controls to supplement income taxation have developed separately. This paper combines these two strands in the standard framework of optimal non-linear income taxation. We use a model with two types of households where the government has access to both subsidy policy and public provision of a good substitutable for leisure, and ouseholds can supplement the publicity provided good from the market. We present conditions under which policy should involve one or both of these two instruments alongside income taxation. The model is extended to many ability types.     

Optimal tax treatment of private contributions for public goods with and without warm glow preferences

Tax-favored contributions for financing some public goods may be a useful part of optimal nonlinear income tax and expenditure policy. There are two sides to the potential gain from subsidized donations. First, for a given level of public good provision, higher private donations from high earners than low earners eases the incentive compatibility constraint for donors and so can raise social welfare. This follows since considering a lower-paid job includes a perception of a drop in public good provision. Second, private donation reduces consumption, easing the resource constraint. This paper explores optimal policy, using first a model with standard preferences and then a model with a warm glow of giving. In addition to showing the conditions for the level of public goods, the paper considers the pattern of optimal subsidization across earnings levels. Analysis of optimal taxation with warm glow preferences is sensitive to the choice of preferences that are relevant for a social welfare evaluation. After considering optimal rules with formulations of social welfare which do and do not include warm glow utility, the paper considers the choice of normative criterion. Like the earlier literature, this paper assumes that organizing private donations is costless while tax collection has a deadweight burden. Since private charitable fundraising is very far from costless, the paper is an exploration of economic mechanisms, not a direct guide to policy.     

Direct Versus Indirect Taxation: The Design of the Tax Structure Revisited

This article studies the optimal direct/indirect tax mix problem when individuals differ in several unobservable characteristics (productivity and endowments). It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods. When cross substitution effects are zero, the expressions resemble traditional many households Ramsey rules. In a Cobb–Douglas illustration, where endowments differ only in good 1 (interpreted as “wealth”), the tax on good 2 provides an indirect way to tax the unobservable wealth.     

On Environmental Taxation under Uncertain Environmental Damage

This paper addresses optimal taxation, when therelationship between the consumption of a`dirty' good and the resulting environmentaldamage is uncertain and treated as a randomvariable by policy makers. The main purpose isto analyze how increased uncertainty, measuredas a mean preserving increase in the spread ofthis random variable, affects the optimalcommodity tax on the dirty consumption good. Incase the only task of government is to correctthe environmental externality, and if thepreferences are characterized by nondecreasingabsolute risk aversion, we find that thecommodity tax on the dirty consumption goodincreases in response to additionaluncertainty. If, on the other hand, thegovernment provides a public good and uses alump-sum tax in addition to the commodity tax,it is possible that the commodity tax decreasesas a response to additional uncertainty, evenif the preferences are characterized bynondecreasing absolute risk aversion. A similarresult emerges, although for different reasons,if the lump-sum tax is replaced by a laborincome tax.     

SOME EMPIRICAL EVIDENCE ON DEMAND SYSTEM* AND OPTIMAL COMMODITY TAXATION

We have two major tasks in this paper. The first is to obtain a reasonable estimate of the Japanese demand system, which includes leisure, income and commodity choices. The second is to compute and evaluate the optimal tax equilibrium. The estimation result, based on the Almost Ideal Demand System, is found to be consistent with the microeconomic theory. We evaluate the optimal commodity tax structure by calculating the equilibria under lump‐sum, optimal commodity and uniform commodity taxation schemes. The deadweight losses under uniform taxation are very small, and the optimal commodity tax rates are strikingly close to uniform.     

Utilitarianism and horizontal equity: The case for random taxation

This paper reports on the use of an algorithm to compute optimal policies in the areas of commodity taxation, international trade and public shadow pricing for a government which is interested in redistributing income but has limited powers of taxation. The algorithm is applied to selected LDC data using a highly simplified general equilibrium model. Some insight into the relationships between constraints on taxation and other areas of government policy is provided by analyzing models where domestic tax restrictions can make inefficient public production or tariffs on international trade desirable.     

Optimal Provision of Public Goods: A Synthesis*

The standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns. A new approach neutralizes distributional concerns by adjusting the income tax schedule. We demonstrate that both approaches are derived from the same basic formula. We also take the new approach further by deriving an intuitive formula for the optimal level of public goods, without imposing strong assumptions on preferences. This formula shows that distortionary taxation has a role to play, as in the standard approach. However, the main determinants of optimal provision are different, and the modified Samuelson rule is likely to lead to underprovision.     

Optimal mixed taxation,public goods and the problem of high-skilled emigration

The optimal income tax model under the threat of migration of Simula and Trannoy (J Public Econ 94:163–173, 2010; Soc Choice Welf 39(4):751–782, 2012) is extended to include indirect taxes and public goods. This enables us to conclude that: (1) optimal income tax rates are higher than in the absence of indirect taxation, and may be positive at the top of the skills distribution; (2) indirect taxes, à la Corlett and Hague, may help mitigate the loss of redistributive capacity arising from income taxation caused by migration threats; (3) migration encourages the provision of the public goods preferred by the most productive workers; (4) optimal tax and public goods provision policies against the emigration of the highly-skilled are connected through the conditions for Pareto efficiency; (5) if the number of potential migrators is large, it may be desirable to violate classical tax rules to retain the most able in the home country; (6) when migration costs are exogenously given and utility is weakly separable, Simula and Trannoy’s results are restored; (7) if migration costs are endogenous, the Atkinson and Stiglitz theorem breaks down and the taxation of country-specific goods becomes desirable, even if utility is strongly separable.     

Tax incentives in fiscal federalism: an integrated perspective

Abstract Models of fiscal federalism rarely account for the efficiency implications of intergovernmental fiscal ties for federal tax policy. This paper shows that fiscal institutions such that federal tax deductibility, vertical revenue‐sharing, and fiscal equalization (being common features of existing federations) encourage local taxation, but may discourage federal taxation. Furthermore, the structure of public spending is skewed towards local spending. We also show that, when considering Leviathan governments, fiscal institutions reduce confiscatory taxation by the federal government. The result is contrary to the Cartelization Hypothesis ( Brennan and Buchanan 1980 ). Finally, we characterize the efficient design of intergovernmental fiscal ties.     

The public and private provision of pure public goods and the distortionary effects of income taxation: a political economy approach

Abstract .  A pure public good is provided by the government and the voluntary contributions of two types of households. The government finances its contribution by means of income taxation. The latter has distortionary effects. A third type of household never makes contributions. We analyse the effects of changes in the income tax rate on (a) the provision of the public good, (b) the private contributions of the households, and (c) changes in the distribution of income and welfare between contributing and non-contributing households. We derive a simple and testable condition under which the lowering of the income tax entails a Pareto improvement.     

The Taxation of Financial Capital under Asymmetric Information and the Tax‐competition Paradox

Information sharing between governments is examined in an optimal‐taxation framework. We introduce a taxonomy of alternative systems of international capital‐income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion found in earlier literature that integration of international caopital markets may lead to the under‐provision of publicly provided goods. However, in contrast to previous results in the literature, under‐provision occurs due to inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public‐good provision as well as complete and voluntary information exchange between national tax authorities.     

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.     

Democratic public good provision

This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations. We focus on politico-economic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving.     

The Time‐Consistent Public Goods Provision

In this study, we reconsider the optimal nonlinear tax problem with the public good from the perspective of the commitment issue and examine how it affects the condition of the public good provision. We show that the Samuelson rule should be modified when the government cannot commit and the skill types of taxpayers are revealed in the first period. This is true even if the preference of the taxpayers is separable and additive with respect to consumption and leisure. Our analysis also shows how the lack of commitment affects the formula of the marginal cost of public funds and the level of public good provision. Our findings imply that the level of the public good may be excessive in comparison to the case where the government can commit to its tax policy.     

Conspicuous Leisure: Optimal Income Taxation When Both Relative Consumption and Relative Leisure Matter*

In previous studies on public policy under relative‐consumption concerns, leisure comparisons have been ignored. In this paper, we consider a two‐type optimal non‐linear income tax model, in which people care about both their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both ability types, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component (i.e., a component that is larger for the high‐ability type than for the low‐ability type). Leisure positionality does not modify the policy rule for public‐good provision.     

Using distance functions to understand interest taxation

One of Terence Gorman's insights was that if one wants to derive rules about optimal commodity tax rates (or prices) one should treat quantities consumed as the instruments. This paper builds on Angus Deaton's development of this idea using distance functions. I identify necessary and sufficient conditions for uniform commodity taxation in a static model and the efficiency of various tax structures in a life‐cycle model. One implication is that the optimal interest tax rate may be higher when ordinary or compensated labour supply elasticities are lower.     

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.     

Optimal environmental taxation and enforcement policy

We study the optimal environmental taxation and enforcement policy when (i) the regulator does not know the firms’ abatement costs, (ii) penalties for tax evasion are limited, and (iii) monitoring of pollution is costly. We show that the threat of being audited alter the usual firms’ incentives to over-estimate their abatement costs. In particular, depending on the firms’ abatement costs, the optimal policy may involve over or under-deterrence compared to the full information outcome. We then investigate the properties of a pollution standard. We show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered.