Growth Effects of Taxation Under Altruism and Low Elasticity of Intertemporal Substitution

An increase in the tax rate on capital income may raise the rate of economic growth when the elasticity of intertemporal substitution is low and intergenerational transfers are absent. Since the strength of the bequest motive depends on tax rates, this paper provides conditions under which taxing capital income, and then reducing the labour income tax, is more growth enhancing than the classical policy of zero taxes on capital income, and vice versa.     

Productivity versus elasticity: a normalized constant elasticity of substitution production function applied to historical Soviet data

This study tests the extensive growth hypothesis, which would attribute the Soviet economic slowdown to low elasticity of substitution and over-investment rather than deteriorating productivity growth. To circumvent the low availability of data, widely applicable new methods for estimating productivity and elasticity of substitution were developed based on the normalized constant elasticity of substitution (CES) production function. One is an extended version of the Solow residual calculation, and the other is a direct estimation of the time-varying parameter normalized CES production function. The application of the methods to the Soviet data showed a decreasing trend in productivity growth and a low elasticity of substitution of approximately 0.25. The results neither reject nor support the extensive growth hypothesis because of uncertainty in the interpretation of the low elasticity of substitution. The results suggest that it is reasonable to assert that both deteriorating productivity growth and low elasticity of substitution caused the Soviet economic slowdown. Further empirical studies on productivity and elasticity of substitution in the Soviet and other economies are necessary to fully understand relations between productivity growth, elasticity of substitution and economic development.     

Government expenditure,external and domestic public debt,and economic growth

This paper analyzes the relationship between government expenditure, tax on returns to assets, public debt, and growth in an endogenous growth model. Public debt is composed of two components, domestic debt and external debt. We show conditions for existence, uniqueness, and multiplicity of the steady states. More precisely, existence of steady state requires a sufficiently high productivity and a sufficiently low tax on returns to assets. We also provide the effects of an increase in the tax rate on returns to assets on the steady state. In particular, the relation between public spending and the tax rate has a bell shape. Domestic debt unambiguously increases with tax whereas external debt displays an inverted U‐shaped curve. A high tax rate leads to a reallocation of public debt in favor of domestic debt (to the detriment of external debt). The effect of taxation on consumption (and production) also displays a nonlinear pattern when the output elasticity of capital is lower than unity (the effect is monotonously increasing if this elasticity is unity). We also derive the conditions under which a tax increase can boost or reduce the balanced growth rate.     

Optimal size of the government: the role of the elasticity of substitution

This paper analyzes the optimal fiscal policy in an endogenous growth model with productive public services. Government expenditure, which may be subject to different degrees of congestion, is financed by distortionary income taxation. The standard result on the equality between the growth-maximizing, welfare-maximizing and first-best income tax rates holds if and only if production is Cobb–Douglas or there is proportional congestion. With non-proportional (or in the absence of) congestion, the first-best income tax is lower than the (second-best) welfare-maximizing income tax which, in turn, is lower than the growth-maximizing income tax if the elasticity of substitution is below unity. Under mild conditions these relations are reversed if the elasticity of substitution is above unity. Intuition on these results is also provided.     

Optimal Design of Forest Taxation with Multiple-Use Characteristics of Forest Stands

The paper studies optimal forest taxation under uncertainty about future timber price when private forest owners value amenity services of forest stands and forest stands have public goods characteristics. It is assumed that preferences of forest owners can be described by a quasi-linear, intertemporal utility function which reflects risk aversion in terms of consumption and constant marginal utility in terms of amenity services. The comparative statics of current and future harvesting in terms of timber price risk, site productivity tax and yield tax are first developed. It is shown that, given the optimal site productivity tax, which is independent of the timber harvested and thus non-distortionary, it is desirable to introduce the yield tax at the margin; it both corrects externality due to the public goods characteristic of forest stands and serves as a social insurance device. The optimal yield tax is less than 100% and depends on the social value of forest stands, timber price risk and properties of compensated timber supply. In the general case the 'inverse elasticity rule – according to which the optimal yield tax is negatively related to the size of the substitution effects – may not hold. Under certainty, the desirability of the yield tax, given the optimal site productivity tax, depends only on the existence of public goods characteristic and is thus a pure Pigouvian tax.     

Capital Expansion, Endogenous Growth and Equilibrium Unemployment

A model is developed, which captures the interactions of unemployment and economic growth in general equilibrium. The economy evolves along a correct-expectations equilibrium path exhibiting endogenous job rationing, and productivity growth is driven by installation of new capital. Under the maintained hypothesis that the elasticity of substitution between capital and labour is less than unity, unemployment benefits are shown to shift up the whole path of equilibrium unemployment, leaving the economy with a higher natural rate of unemployment and lowering the long-run growth rate permanently. Investment tax credits financed by lump sum taxes on total income are capable of lowering the natural rate and raising the economy's growth rate.     

Openness to trade as a determinant of the macroeconomic elasticity of substitution

Several theoretical and empirical studies on economic growth consider the macroeconomic elasticity of substitution between capital and labor as a measure of economic flexibility that depends on technological as well as institutional aspects. One institutional aspect of economic flexibility is openness to trade. I examine in a Heckscher–Ohlin model with two large countries trading intermediate goods how openness affects the elasticity of substitution. If the technology has a constant elasticity of substitution in a closed economy, opening up to trade raises the elasticity of substitution only in the country that accumulates capital at a faster rate.     

Consumption tax and economic growth in an overlapping generations model with money holdings

This paper examines the effect of a consumption tax on economic growth using an overlapping generations (OLG) model with money holdings. We show that the neutrality of the consumption tax does not hold in the money-in-the-utility-function model, because a change in consumption taxation induces the substitution of money holdings for consumption, and the money is the net wealth within the OLG structure. An increase in the consumption tax rate lowers (raises) the growth rate under a low (high) monetary expansion rate. On the other hand, in the cash-in-advance model and the money-in-the-production-function model, the neutrality of consumption taxation holds even within the OLG structure, because in these models there is no substitution of consumption and money holdings.     

Commodity Taxation and Economic Growth

We construct a variety expansion growth model following Grossman and Helpman (1991) and incorporate various groups of goods into the model. Each group has its own elasticity of substitution. We seek to determine the goods on which the government should impose higher rates of commodity tax in order to raise a certain amount of tax revenue. We thus reconsider the Ramsey Rule (the Inverse Elasticity Rule) in a growing economy.     

Optimal taxation of externalities interacting through markets: A theoretical general equilibrium analysis

This study develops a theoretical general equilibrium model to examine optimal externality tax policy in the presence of externalities linked to one another through markets rather than technical production relationships. Analytical results reveal that the second-best externality tax rate may be greater or less than the first-best rate, depending largely on the elasticity of substitution between the two externality-generating products. These results are explored empirically for the case of greenhouse gas and nitrogen emissions associated with biofuels and petroleum.     

Consumption externality, efficiency and optimal taxation in one-sector growth model

In an economy with consumption externalities, existing studies find that a competitive equilibrium is efficient in the long run and remains efficient in transitions if preferences are homothetic. This paper revisits the efficiency issue in an otherwise standard one-sector growth model where consumption externalities affect a utility via their effects on the time preference. We find that even if preferences are homothetic, the externality changes the marginal rate of substitution between now and future and leads to a disparity in the intertemporal elasticity of substitution between the centrally planned economy and a decentralized economy. As a result, a competitive equilibrium is inefficient in transition dynamics. We characterize an optimal tax/subsidy structure that enables the allocation in a decentralized economy to replicate the social optimum.     

Monetary Policy with Parameter Uncertainty in Small-Open Economy

This paper computes optimal robust monetary policy in a new Keynesian small-open economy model with Knightian uncertainty about the degree of price stickiness and the elasticity of substitution between domestic and foreign goods. Due to the simple model structure used in the paper, I can derive analytical results for the min–max solution under discretion and assess how a robust optimal Taylor rule must be set in small-open economy. I find that, in an optimal robust discretionary equilibrium, the central bank should assume that the degree of price stickiness and the elasticity of substitution between domestic and foreign goods take on their highest numerical values. In terms of interest rate setting, if the optimal discretionary robust equilibrium is implemented with a Taylor rule, the policy rate should react to inflation in a less aggressive way than in the case of complete information.     

中国区域要素替代弹性变迁及其增长效应——基于异质劳动视角的随机前沿生产函数分析

文章采用1996-2014年省际面板数据构建区域随机前沿生产函数模型,从劳动异质性视角拓展要素替代弹性分析;并首次联合运用协整方程和误差修正模型,从长期均衡和短期波动过程分析来揭示要素替代约束对经济增长的影响.结果发现:尽管三大区域各自的要素替代弹性变化显著不同,但要素替代弹性的增长效应却彼此具有一致性.其中,东部地区的资本-劳动替代弹性明显地存在着0.805的增长门槛,只有西部地区的资本-劳动替代弹性越过了门槛值,与区域增长具有尚不显著的正相关性而支持德拉格兰德维尔假说;三大区域的资本-技能互补性提高对经济增长的推动作用都不明显;劳动-技能替代弹性则表现为显著的正向增长效应,显示出各区域存在着人力资本红利.值得注意的是,与均衡增长路径上"资本-劳动替代弹性提高能够推动经济增长"的德拉格兰德维尔假说不同,在考虑劳动异质性和技术非效率的前提下,中国地区增长更支持"劳动-技能替代弹性提高能够推动经济增长"的结论.文章为甄别新常态下的区域增长潜力转变、剖析要素匹配合理性及产业结构调整可行性奠定基础.     

On Corporate Tax Asymmetries and Neutrality

This article discusses the effects of corporate tax asymmetries under investment irreversibility. We introduce a tax scheme where the tax base is given by the firm's return net of a rate of relief. When the firm's return is less than the imputation rate, however, no tax refunds are allowed. Unlike symmetric tax systems, the scheme proposed is neutral with respect not only to income uncertainty but also to policy uncertainty.     

Neutral taxation under uncertainty

The analogs under uncertainty of two well-known certainty results are derived: first, if there are timing differences between tax payments and accruals, neutrality is preserved if the resulting tax credits or liabilities are carried forward at the risk-free interest rate, provided that tax credits and liabilities are sure to be redeemed eventually. Second, the invariance of asset valuations with respect to the rate of income tax, at a given pre-tax interest rate, proved by Johansson and Samuelson under certainty, can be extended to cover the case of uncertainty, given analogous ceteris paribus conditions.     

Self-selection and Pareto efficient taxation

This paper analyses the set of Pareto efficient tax structures. The formulation of the problem as one of self-selection not only shows more clearly the similarity between this problem and a number of other problems (such as the optimal pricing of a monopolist) which have recently been the subject of extensive research, but also allows the derivation of a number of new results. We establish (i) under fairly weak conditions, randomization of tax structures is desirable; (ii) if different individuals are not perfect substitutes for one another in production, then the general equilibrium effects—until now largely ignored in the literature—of changes in the tax structure may be dominant in determining the optimal tax structure; in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor, the optimal tax structure entails a negative marginal tax rate on the high ability individuals, and a positive marginal tax rate on the low ability individuals (the marnitude of which depends on the elasticity of substitution); (iii) if individuals differ in their preferences, Pareto efficient taxation may entail negative marginal tax rates for high incomes; while (iv) if wage income is stochastic, the marginal tax rate at the upper end may be 100%.Our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic.     

Taxation, Human Capital Accumulation and Economic Growth

Previous studies have shown that tax rates and the growth rate of output are negatively related under the assumption that government wastes tax revenues. This paper shows that, if tax revenues are used for human capital accumulation, tax rates and the growth rate can be positively related. An increase in the human capital tax rate will increase (decrease) the growth rate when the initial tax rate is small (large). An increase in the physical capital tax rate will increase the growth rate when savings are completely interest-inelastic. The effects of income taxes and lump-sum taxes on growth are also analysed.
JEL Classification Numbers: E6, H2, O4.     

The Optimal Linear Income Tax Model: Utility or Equivalent Income?

This paper compares the use of equivalent income with that of utility, in the social welfare function, in optimal income tax models. Equivalent income is a money metric welfare measure that, unlike utility, is not affected by monotonic transformations of utility. The use of equivalent income is found to produce an optimal tax rate that is more sensitive to the degree of inequality aversion, compared with the use of utility. With Cobb-Douglas and CES utility functions, the optimal tax rate is the same for utility and equivalent income where relative inequality aversion is unity. When using equivalent incomes, the case for high marginal rates does not depend on the assumption of a very low elasticity of substitution between consumption and leisure.     

Commodity tax structure under uncertainty in a perfectly competitive market

In a partial equilibrium setting without price uncertainty, the balanced-budget substitution of an ad valorem tax on output for a specific (unit) tax can enhance welfare in imperfectly competitive markets and is without impact in a competitive world. This paper demonstrates that a substitution of this kind can also increase expected output and welfare in a competitive market characterised by uncertainty about the commodity price, if firms can respond to the revelation of demand conditions by altering output.     

Fiscal policy under a minimum‐time objective

In an endogenous growth model, we characterize the fiscal policy driven by a minimum‐time objective of economic development. We find that in equilibrium government should levy the highest possible consumption taxes, reduce public expenditures to the lowest possible level, and keep labor income tax rate and capital income tax rate satisfy a substitution relationship at the balanced budget constraint. We also identify the condition under which income tax rate should be set to zero. We further find that the equilibrium fiscal policy is equivalent to the growth‐maximizing fiscal policy, whereas it generally deviates from the welfare‐maximizing fiscal policy. We hence identify a circumstance where setting the policy goal of reaching an economic‐performance target as soon as possible cannot be justified in the sense of maximizing the welfare of households.