Carbon-reducing taxes and income inequality: general equilibrium evaluation of alternative energy taxation in Taiwan

Recently, several studies have been a detailed evaluation of the economic implications of energy taxation as a policy instrument to conserve energy and reduce carbon emissions. However, little attention has been devoted to inquiring about the economic implications of energy taxation in the newly industrialized countries (the so-called NICs). In this paper, we use a multisector, multihousehold computable general equilibrium model to assess the distributional effects of alternative energy taxation on the Taiwan economy. The counterfactual simulation technique is applied to investigate the income distribution implications of: (1) an increase in the import taxes of crude oil; and (2) an increase in the excise taxes of petroleum products. Our empirical results basing on Taiwan's data show that both energy taxes increase government revenue and the Gini coefficient, but reduce net value-added, private consumption, disposable income and equivalent variation. A raise in the Gini coefficient implies that there is a worsening in the distribution of income. The lowest income group suffers relatively large welfare and income loss, but the highest income group suffers a relatively small welfare and income loss. The distributional effects differ from household to household depending on the composition of their total consumption and the source of their factor income. Our findings reveal that the energy tax appears to be mildly regressive, there are broadly consistent with those cases of developed countries reported in previous studies.     

Expenditure taxes,income taxes,and time-inconsistency

Traditional welfare-based comparisons of different tax structures implicitly assume that the government can precommit to its future optimal policy. When optimal tax rates are time- inconsistent, however, such comparisons may be misleading. This paper uses a two-period representative-consumer optimal taxation model to study the implications of time-consistency for the welfare rankings of expenditure and income taxation. I show that the welfare rankings of optimal policies may not be preserved by time-consistent ones.     

Migration and optimal income taxes

The issue addressed in this paper is the optimal taxation of incomes earned in the home economy, and of incomes earned abroad, when people can migrate. As a preliminary, the optimal taxation of home incomes when there is migration and no taxation of foreign incomes, is discussed. Then in a more general setting, we deal with optimal taxation of different kinds of labour when another kind of labour is not taxable, and show how this bears on the taxation of foreign incomes. The last sections of the paper analyse a simple model in which people choose between taxable labour at home, taxable labour abroad, and untaxable labour. A condition is found implying that the optimal tax on foreign income is higher than on the home income of a person of equal utility.     

Efficiency wages and income taxes

The paper was written during a visit at the Ludwig-Maximilian-University of Munich in the summer of 1988. The hospitality of this institution, as well as the financial support from a Ruhrgas Scholarship under the West German Norwegian Scholarship Scheme, is gratefully acknowledged. Participants at various seminars have given useful comments and criticism. I am also grateful to two anonymous referees for their comments to an earlier version of the paper.     

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.     

Voting over income taxation

A major problem of the positive theory of income taxation is to explain why statutory income tax schedules in practice are marginal-rate progressive. While it is commonly believed that this is but a simple consequence of the fact that the number of relatively poor voters exceeds that of richer voters in general, putting this contention in a voting equilibrium context is not a trivial task. We do this here in the context of nonlinear taxation and attempt to provide a formal argument in support of this heuristic claim. We first establish the existence of mixed strategy equilibria and identify certain cases in which marginal-rate progressive taxes are chosen almost surely by the political parties. Unfortunately, we also find that if the tax policy space is not artificially constrained, the support of at least one equilibrium cannot be contained within the set of marginal-rate progressive taxes.     

Linearly progressive income taxes and stabilization

It has been shown that progressive income taxes may lead to saddle-point convergence when the marginal tax rate is assumed to be a continuously increasing function of income. This note shows that linearly progressive taxes may also immunize the economy against indeterminacy and sunspot equilibria. Therefore, our analysis suggests that exemption thresholds, as featured by prevailing tax codes, may help to stabilize the economy.     

Efficient timing of income taxes

The marginal collection cost of an income tax is predicted to be a martingale, and the marginal income tax rate is predicted to be a supermartingale. Collection costs can be estimated from tax rates. Almost all tests based on a U.S. series of actual marginal income tax rates, 1913–1975, accept the hypothesis of random-walk behavior in collection costs, and reject the parallel hypothesis on tax rates.     

Capital income taxation and perfect foresight

This paper develops a perfect foresight model of capital income taxation in a representative household neoclassical one-sector framework. The household sector is based on intertemporal utility maximization. The main result is the equivalence of a perfect foresight solution and an artificial central planning solution; if there is no tax, this is the equivalence of a market equilibrium and social optinum. The equivalence result is used to deduce the implications of a partial tax reform policy. It is shown that a partial reform increases capital at each time following the initial period of the program.     

Efficiency aspects of increasing inheritance taxes while decreasing income taxes

This article tries to shed some light on the economic efficiency aspects of a tax reform that would increase inheritance taxes while decreasing income taxes. An analysis of labour market decisions following the activation of such a reform is presented. An international comparison of inheritance tax collection shows that almost all industrial countries impose an inheritance tax. However, government revenue from inheritance and gift taxes in Europe is lower than 1% of GDP and is very low in the United States as well. Applying the proposed reform could increase work hours and delay retirement decisions.     

Negative income taxes,inequality and poverty

We use a neoclassical growth model with heterogeneous agents to analyze the redistributive effects of a negative income tax system, which combines a flat rate tax with a fully refundable credit (“demogrant”). We show that changing the demogrant‐to‐output ratio causes significant changes in the distribution of income. Specifically, we find that increasing the demogrant‐to‐output ratio sharply reduces the level of inequality as well as both relative and absolute poverty (all measured in terms of post‐tax total income). However, these reductions in inequality and poverty come at the expense of a significant reduction in output.     

Growth, income taxes and consumption aspirations

In a Barro-type economy with exogenous consumption aspirations, raising income taxes favors growth even in the presence of lump-sum taxes. Such a policy is compatible with the behavior of private consumption, income taxes and growth rates observed in actual economies.     

Public health insurance and optimal income taxation

If individuals differ not only in their inherent capacity to earn income, but also in the probability that they will fall ill, can subsidized public health insurance be justified on the grounds that it serves as an efficient tool to redistribute welfare? This question is analyzed in a model where the social welfare function is a weighted average of individual expected utilities, and where taxation is by a linear income tax. The answer is ‘yes’, except in certain special cases.     

Differential income taxation and household asset allocation

This article empirically investigates the effects of differential income taxation on households’ portfolio choice and asset allocation, applying a two-stage budgeting model of asset demand to German survey data. The model is structured into the discrete and the continuous asset choice. Cross-sectional variation in marginal tax rates, appropriately instrumented, as well as over-time variation from a major tax reform are used to identify the tax effects. Households with higher tax rates are found to have relatively greater demand for tax-privileged assets, such as nonowner-occupied housing, mortgage repayments, building society deposits, stocks, insurances and consumer credits, than households with lower tax rates. Demand at higher tax rates is lower for owner-occupied housing, bank deposits and bonds.     

Optimal income taxation with tax avoidance

We determine the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is sufficiently small. This contrasts with the results of Grochulski who shows that, using a subadditive cost function, all individuals should report their true income. We also provide a characterization of the optimal income tax curve.     

Inequality-growth nexus under progressive income taxation

Within heterogeneous-household extensions of Romer’s (1986) one-sector representative agent model of endogenous growth, this paper finds that changes made to the U.S. statutory income tax in the past decades account for a substantial portion of the following stylized facts: (i) U.S. income inequality significantly deteriorates since the mid-1980s; (ii) the inequality-growth nexus displays a positive slope before and after the implementation of the Tax Reform Act of 1986 (TRA-86); and (iii) the slope of the inequality-growth nexus sharply declines between the pre- and post-TRA-86-reform periods, indicating less deterioration in real GDP per capita growth when pursuing a more equal income distribution after 1986. In addition to income inequality, the responses of several other measurements of inequality to changes in the tax code parameters are also explored.     

An alternative approach to income taxation

We take an alternative approach to income taxation in this paper. We view the income tax schedule as the outcome of a voting process, rather than the optimal choice of a “benevolent social planner”. We show that it is very likely for majority voting to lead to the adoption of a regressive income tax schedule, depending on the per capita government revenue requirement and the mean productivity of the population, which is in sharp contrast with the result derived from the traditional “benevolent social planner” approach to income taxation; and that given the adoption of a regressive income tax schedule, the income tax schedule would become less regressive as the ratio of the per capita government revenue requirement over the mean productivity of the population increases. Our work might shed some light on both the prevalent adoption of regressive state tax systems and the cross-state difference in terms of tax systems.     

Optimal nonlinear income taxation with learning-by-doing

This paper examines a two-period model of optimal nonlinear income taxation with learning-by-doing, in which second-period wages are an increasing function of first-period labour supply. We consider the cases when the government can and cannot commit to its second-period tax policy. In both cases, the canonical Mirrlees/Stiglitz results regarding optimal marginal tax rates generally no longer apply. In particular, if the government cannot commit and each consumer's skill-type is revealed, it is optimal to distort the high-skill type's labour supply downwards through a positive marginal tax rate to relax an incentive-compatibility constraint. Our analysis therefore identifies a setting in which a positive marginal tax rate on the highest-skill individual can be justified, despite its depressing effect on both labour supply and wages.