The effects of tax reform on labor supply, tax revenue and welfare when tax avoidance matters

We examine how tax avoidance in the form of trade in well-functioning asset markets affects the study of labor supply. We discuss the implications for tax policy analysis, and we show that a failure to account for avoidance responses may lead to huge errors when analyzing how tax reform affects labor supply, tax revenue and the welfare cost of taxation. Our model may explain a number of otherwise hard to understand dimensions of taxpayer response.     

Accelerated depreciation and the efficacy of temporary fiscal policy: Implications for an inflationary economy

The effect on investment of temporary tax rate changes depends on the age profile of depreciation deductions. If the depreciation allowance schedule is accelerated, then temporary cuts in the corporate tax rate could reduce investment. Inflation causes the age profile of real depreciation deductions to become accelerated and thus could make temporary tax cuts have a contractionary effect on investment. Two currently proposed reforms are shown to exacerbate this effect. Under each of these proposals, temporary tax cuts are likely to have opposite effects on investment in short-lived and long-lived capital, thereby complicating the conduct of countercyclical fiscal policy.     

A note on the existence of a monetary equilibrium over an infinite horizon

Summary. This note considers an economy with ‘inside money’ that extends over an infinite horizon in the case of certainty. It shows the existence of an equilibrium and the indeterminacy of the overall price level when the supply of balances is set exogenously.Received: 6 November 2003, Revised: 2 September 2004 JEL Classification Numbers: D50, E40, E50.G. Bloise: I am indebted to Jacques Dréze, Leo Ferraris, Cuong Le Van, Luca Panaccione, Herakles Polemarchakis and Pietro Reichlin for the long discussions and their valuable suggestions. I also thank an anonymous referee for her/his advices.     

A note on the neutrality of the cash flow corporation tax

The cash flow tax has been widely recommended as a form of taxing corporate income which is neutral with respect to investment decisions. This note points out that the claim is valid only under the assumption that the tax rate is constant over time. By contrast, an ‘ideal’ profits tax is neutral whatever the time shape of the tax rate.     

Measuring the effects of preservation on farm profits in a continuous treatment setting

Despite billions of dollars of public appropriations to state purchase of development rights (PDR) programmes, there has been limited evaluation of the effects of these investments on the economic performance of preserved farms. This article estimates dose-response functions to evaluate the effects of enrolment in New Jersey’s PDR programme on farm profitability. The generalized propensity score method in a continuous treatment setting is used to address selection bias arising from voluntary programme participation. Treatment effects are measured across treatment levels to determine whether farm profitability is affected differently across levels of programme participation. Our findings reveal that, relative to unpreserved farms, profit per acre tends to increase along lower treatment levels. The profit per acre of preserved farms in the 1–40% treatment range is, on average, $407 higher than that of unpreserved farms in the full sample. Positive profit differentials averaging between $317 and $472 per acre are also observed in the 1–20%, 1–40% and 1–60% treatment quintiles in the farming occupation sample. We do not observe statistically significant profitability differentials when treatment effects are averaged across all positive treatment values.     

A note on the existence of Nash networks in one-way flow models

We study the one-way flow model of network formation with owner-homogeneous link costs and heterogeneous profits. Recently, several proofs of existence of Nash networks are discussed in literature. The proof by Billand et al. (Econ Theory, 2007, forthcoming) is based on a nice and clear idea, but the technical elaboration is tedious and too complex in our opinion. In this note, we provide an alternative and easy accessible proof based on the same idea. Also, we show by means of a counterexample that Nash networks may not exist for games where link costs are heterogeneous, but arbitrarily close to owner-homogeneity.     

The beneficial effects of generous unemployment benefits on profits and employment

Theories of the labor market generally predict that high unemployment benefits put upward pressure on wages, thus diminishing the profitability of employing labor and exacerbating unemployment. It remains to be explained why firms agree to contribute to generous schemes (replacement rates for general schemes in Europe and US are in the range 50–85%) that they are often willing to supplement (with sector- or firm-specific schemes that may involve even 100% replacement and long benefit duration). An answer can be found by including in the shirking–efficiency wage model, the hypotheses that workers are risk-averse and that those discharged for misconduct are not eligible to benefits. It is then optimal for risk-neutral firms (and for employment) to introduce an insurance scheme with full income coverage and with a duration limited only by the workers' participation constraint (there is no trade-off between level and duration of benefits). The more difficult it is to detect and fire shirkers, the higher is the rent workers enjoy above the competitive wage and the longer is the benefit duration consistent with the participation constraint. This result can be interpreted as a complementarity between the strictness of employment protection legislation (EPL) and the duration of benefits, which seems to conform with broad patterns observed in primary vs. secondary employment and in continental Europe vs. Anglo-Saxon countries.     

A note on the interactions among monetary policy,the tax structure and equilibrium output

The proposition that the level of real income is independent of the money stock, originally discussed by quantity theorists, is currently being debated in terms of the rational expectations hypothesis. In this paper, we consider the interactions among monetary policy, the tax structure, and the supply side of the economy and show a potentially important qualification to this proposition. Further, we argue that the impact of monetary policy on output may be perverse.     

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.     

Two-sector perspectives on the effects of payroll tax cuts and their financing

This paper analyzes the consequences of lifting from labor some of the burden of taxation in a life-cycle two-sector setup where a consumption good is produced alongside a capital good. The analysis focuses on the implications of alternative ways of financing payroll tax cuts in closed and small-open neoclassical economies. In our models payroll tax cuts do not necessarily stimulate hours worked in the stationary state. We show, for example, that in the closed economy –paradoxically– long-run aggregate labor hours and the capital stock will be reduced if labor tax proceeds are replaced by capital taxation. If instead government purchases of the capital good (or government labor services) are decreased, manhours are left unchanged in the long-run, while capital formation is spurred. In the small-open economy it is only if the offsets are a fall in entitlement spending or a rise in the wealth tax that aggregate manhours are increased —otherwise steady state hours worked are invariant.     

Assessing the impact of Nigeria's naira depreciation on output and inflation

This research examined the impact of the 3 May 1999 tornado on the Oklahoma City labour market. We estimated time series models that allow for time-varying variance in employment growth. The models include intervention variables designed to capture the tornado's effect at initial impact as well as over the post-tornado period. In terms of total employment growth, the Oklahoma City Metropolitan Statistical Area (MSA) experienced an increase in employment growth and a reduction in labour market risk in the sample period following the tornado. The analysis also examined the effect of the weather event on eight industrial sectors. Five of eight sectors experienced significant decreases in labour market risk after the tornado. Our evidence suggests that Oklahoma City and surrounding communities that make up the Metropolitan Statistical Area survived the disaster without suffering any extended adverse labour market effects. Our results indicate that at least in the aggregate, the labour market improved.

“…?what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war?…?all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.”?–?J.S. Mill (1848 Mill, J. 1848. Principles of Political Economy, Edited by: Ashley, WJ. New York: A M Kelley Publishers. 1965 [Google Scholar])     

An empirical note on relative monetary expansion and depreciation: The case of the Lira-Swiss franc exchange rate (February 1973–December 1976)

This note presents an empirical test of fluctuations in the spread between the lira Swiss franc exchange rate for bank notes and cable transfers in Zurich. This spread is trendless, and since the market for Italian bank notes in Zurich is relatively small, it is virtually free from reverse causation in relation to relative monetary expansion. The tests show that relative monetary expansion is the main determinant of fluctuations in the spread.     

Optimal taxation and cross-price effects on labor supply: Estimates of the optimal gas tax

This study estimates parameters necessary to calculate the optimal second-best gasoline tax, most notably the cross-price elasticity between gasoline and leisure. Prior theoretical work indicates the importance of this elasticity, but despite this, almost none of the prior studies of commodity taxation (and none of the studies on second-best environmental regulation) actually estimate it. Using household data, we find that gasoline is a relative complement to leisure, and thus that the optimal gasoline tax is significantly higher than marginal damages-the opposite of the result suggested by the bulk of the prior literature. Indeed, even if there were no externalities at all associated with gasoline, the optimal tax rate would still be almost equal to the average gas tax rate in the U.S. Following this approach to estimate cross-price elasticities with leisure could strongly influence estimates of optimal rates for other important commodity or pollution taxes.     

On the theory of the competitive firm with a utility function defined on profits and regret

In this paper we analyze the optimal output determined by a competitive firm facing uncertain demand. We analyze the effect of introducing uncertainty and the effect of increasing uncertainty on the optimal output, under the assumption that the utility function of the firm depends both on profits and on regret. We show that if the firm is more risk averse to profits than to regret (in a sense described below), both effects tend to decrease the optimal output. Similar effects of introducing uncertainty and of increased uncertainty were previously shown by Sandmo (1971) to exist in the case where utility is defined on profits only. Thus, this paper provides conditions under which the above results hold true, even when utility is defined on regret and on profits.     

Commodity taxation and imperfect competition : A note on the effects of entry

This paper looks at the effects of allowing the number of firms to vary in Seade's model of oligopoly and taxation. We show that the normative and positive consequences of a specific commodity tax are affected by entry in significant ways.     

A biased firm in a market with complementary products. A note on the welfare effects

We analyse a duopoly setting with complementary products, in which a firm has a bias about its absolute advantage. We show that the bias can internalize parts of the negative externality that the complementarity of goods creates implying a higher producer's surplus. Moreover, we analyse additional conditions, which lead to an increase in the consumer's surplus. Counterintuitively, we show that the presence of a bias can lead to a positive welfare effect.     

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.