Optimal indirect taxation with a restricted number of tax rates

This paper analyzes the optimal structure of indirect taxation when the number of available tax rates is smaller than the number of taxable commodities. Such a constraint requires to choose the levels of tax rates and the groups of commodities that will be taxed at equal rates (or exempted). In a partial equilibrium framework, with a single agent and a low amount of tax collection, it is shown that the process of allocation of commodities to groups depends on both price elasticities and consumption spendings. Still, the optimal tax structure displays a weak form of the inverse elasticity rule; consumption spendings influence the size of the fiscal base, and may lead to many tax exemptions.     

THE FISCAL DIVIDEND MYTH OF AN INCOME/GST TAX SWITCH*

Reaping a windfall fiscal dividend from the taxation of the ‘underground’ economy's expenditures on ‘legitimate’ commodities is often seen as a significant advantage for a goods and services tax (GST) over an income tax. This claim ignores the changes in prices in the underground economy which would arise from the introduction of a GST. Employing a general equilibrium model which allows for tax evasion, we show that any ‘dividend’ arising from a change in the income tax/GST mix is equivalent to a rise in the income tax rate without a GST.     

Public investment,the rate of return,and optimal fiscal policy in a stochastically growing economy

This study examines the optimal fiscal policy in a stochastic endogenous growth model with private and public capital. The government is willing to actualize a socially optimal equilibrium using a lump-sum tax and government debt linked to public investments, subject to the budget constraint under the golden rule of public finance. A socially optimal fiscal policy states that a deterministic rate of return on government bonds sets the marginal product of public capital. Moreover, public investments optimally adjust the ratio of private capital to public capital to equate the rates of return on such capital. The presence of stochastic disturbances results in a disparity between the optimal marginal products of the two types of capital, as reported in previous empirical studies. This disparity significantly affects the socially optimal growth rate in response to investment risk.     

中国均衡性转移支付对地方政府收入行为的激励效应评估*——基于动态空间工具变量与空间杜宾模型分析

本文基于全国县级面板数据，采用动态空间工具变量模型和空间杜宾模型，从地方政府收入行为视角对均衡性转移支付的激励效应进行评估。结果表明：均衡性转移支付对地方政府收入行为具有双重作用。在直接效应方面，其在一定程度上缓解了地方政府的财政压力，且不会对地方政府造成直接税收扭曲影响。但在间接效应方面，均衡性转移支付会引致地区间扭曲的税收竞争。其产生的税基效应和税率效应相互抵消，对地方政府的征税努力的影响不显著，对地方政府的财政收入行为呈现中性影响，并未产生正向激励效应。     

中国均衡性转移支付对地方政府收入行为的激励效应评估——基于动态空间工具变量与空间杜宾模型分析

本文基于全国县级面板数据,采用动态空间工具变量模型和空间杜宾模型,从地方政府收入行为视角对均衡性转移支付的激励效应进行评估。结果表明:均衡性转移支付对地方政府收入行为具有双重作用。在直接效应方面,其在一定程度上缓解了地方政府的财政压力,且不会对地方政府造成直接税收扭曲影响。但在间接效应方面,均衡性转移支付会引致地区间扭曲的税收竞争。其产生的税基效应和税率效应相互抵消,对地方政府的征税努力的影响不显著,对地方政府的财政收入行为呈现中性影响,并未产生正向激励效应。     

Monetary policy and fiscal limits with no-default

This paper discusses monetary and fiscal policy interactions that stabilize government debt. Two distortions prevail in the model economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include a ceiling on the equilibrium debt-to-GDP ratio, zero or negative elasticity of tax revenues, and a political intolerance of raising tax rates. At the fiscal limit two mechanisms restore solvency: fiscal inflation, which reduces the real value of nominal debt, and open market operations, which diminish the size of government debt held by the private sector. Three regimes achieve this goal. In all regimes monetary policy is passive. In all regimes a muted tax response to government debt is consistent with equilibrium. The propensity of a fiscal authority to smooth output is found to determine what is an acceptable response (in the form of tax rate changes) to the level of government debt, while monetary policy determines the timing and magnitude of fiscal inflation. Impulse responses show that the inflation and tax hikes needed to offset a permanent shock to transfers are lowest under nominal interest rate pegs. In this regime, most of the reduction in the real value of government debt comes from open market purchases.     

Optimal fiscal policy in a dynamic multicountry world with public services

The authors construct a dynamic one‐good multicountry growth model with productive government spending and perfect capital mobility to study fiscal interdependence among countries. In the case of a source‐based tax, it is found that there is no strategic interaction and that the equilibrium spending/tax mix coincides with the optimal one. In the case of a residence‐based tax system, however, there is strategic interaction across countries and, under noncooperation, countries tend to spend and tax over and above the optimal Pigouvian level.     

Optimal grouping of commodities for indirect taxation

Indirect taxes contribute to a sizeable part of government revenues around the world. Typically there are few different tax rates, and the goods are partitioned into classes associated with each rate. The present paper studies how to group the goods in these few classes. We take as given the number of tax rates and study the optimal aggregation (or classification) of commodities of the fiscal authority in a second best setup. The results are illustrated on data from the United Kingdom.     

Optimal Nonlinear Income Taxation with Habit Formation

It has recently been shown that incorporating “keeping up with the Joneses” preferences into a prototypical two‐ability‐type optimal nonlinear income tax model leads to higher marginal tax rates for both types of agents. In particular, the high‐skill type faces a positive marginal tax rate, rather than zero as in the conventional case. In this paper, agents’ utility functions are postulated to exhibit “habit formation in consumption” such that the prototypical two‐ability‐type optimal nonlinear income tax model becomes a dynamic analytical framework. We show that if the government can commit to its future fiscal policy, the presence of consumption habits does not affect the standard results on optimal marginal tax rates. By contrast, if the government cannot precommit, the high‐skill type will face a negative marginal tax rate, while the low‐skill type’s marginal tax rate remains positive.     

General Equilibrium Impacts of Monetary and Fiscal Policies on Welfare of Households in South Asia

Impacts of fiscal and monetary policies are assessed in an open economy two sector multi‐household general equilibrium tax model with money for South Asia. Despite impressive growth rates there is evidence for alarming gaps in the distribution of income among households that require very careful design of economic policies. Generally the impacts of fiscal expansions are positive for all categories of households under the flexible price system but the gains are much higher for households in the upper income group than for those in the bottom. In theory the equilibrium relative prices guarantee the optimal allocation of resources in such economy. Simulation results show that demand, output and employment are sensitive to the preferences of consumers, confidence of producers and sector specific production technologies. Monetary policy is super‐neutral under flexible price regime but can complement fiscal policy well when aggregate prices are made sticky. Combination of monetary and fiscal policies in this manner can have extensive impacts in efficiency and redistribution. Higher taxes distort incentives to work and investment from richer households slowing down the economy. This reduces the welfare level of both rich and poor. Flexibility in prices enhances the market mechanism and makes the fiscal policy more effective and efficient.     

Optimal Taxation of Risky Human Capital*

In a two‐period life‐cycle model with ex ante homogeneous households, earnings risk, and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work. Education subsidies are not used for social insurance, but they are only targeted at offsetting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, because education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non‐tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education because of risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor‐market risk, optimal tax rates could be lower than in the case without education subsidies.     

Which border taxes? Origin and destination regimes with fiscal competition in output and emission taxes

This paper posits a two-stage game in tax regime and tax rates to study the property of second-best emission and output taxes in a two-country world with an atmospheric externality. It shows that (i) either the destination–destination or the origin–origin tax regime may constitute the subgame perfect Nash equilibrium of this game; (ii) either regime may Pareto-dominate the other; (iii) it is possible to have a prisoner's dilemma game where the origin–origin regime Pareto-dominates but the choice of the destination regime is the dominant strategy for each country. Other results include (iv) under origin–origin regime: the output tax is used for fiscal competition; the emission tax is set at a rate equal to the (national) marginal social damage of emissions; and public goods are provided suboptimally. (v) Under destination–destination regime: the output tax is ineffective as an instrument for fiscal competition; the emission tax is used not only for combating pollution but also for tax competition; the tax is set at a rate below the (national) marginal social damage of emissions; emissions are pushed above their closed-economy level; the provision of public goods are optimal.     

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.     

Income distribution and equilibrium multiplicity in a stigma-based model of tax evasion

This paper incorporates continuous income distribution into the stigma-based model of tax compliance. The paper investigates the effect of income distribution on the existence of multiple equilibria, and characterizes the conditions under which multiple equilibria emerge. Precisely, multiple equilibria exist if taxpayer incomes are sufficiently homogeneous, because the ‘social coordination effect’ dominates the ‘individual characteristics effect’. Numerical simulations show that the main proposition is robust to allowing two-step audit policies on the part of the tax agency, under the presumption that the best (or good) equilibrium is selected whenever there are multiple equilibria. As a byproduct, the effect of various forms of tax reforms on the optimal two-step audit policy, the equilibrium compliance, and fiscal revenue is analyzed.     

Fiscal Policy and Equitable Growth

This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general-equilibrium model with given exogenous fiscal policy, a nonmonotonic relation exists between the suboptimal long-run growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two properties suggest that an alternative set of government policy instruments affects the response of private sector investment to fiscal policy. Moreover, the different properties of exogenous and endogenous fiscal policy theoretically account for the difference in the relation between economic growth and fiscal policy in empirical studies.     

Optimal tax theory: A synthesis

Necessary conditions for optimal taxation are derived (i) when taxes are constrained to be linear, (ii) when the form of taxation is unconstrained, (iii) when some commodities are subject to nonlinear taxation, the remainder to proportional taxation. Among the results obtained are several that help to determine upon which commodities the tax system ought to bear most heavily. In particular, a criterion for the effect of commodity taxes in the presence of an optimal income tax is found. The paper concludes with a general principle of simple form for optimal economic policies of all kinds.     

Commodity tax competition between member states of a federation: equilibrium and efficiency

The purpose of this paper is to characterize the outcome of tax competition between autonomous fiscal authorities. It treats the case of a two-region economy, where an origin-based commodity tax is levied by each region on some private good to finance a local public good. A second private good is untaxed.We first describe ‘regional market equilibria’, whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices, taxes, and transportation costs. Next, regional optimal tax levels and public good quantities are derived, the tax of the other region being held constant. Fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other.A ‘noncooperative fiscal equilibrium’ (NCFE) is then defined as the pair of fiscal choices such that each region's tax and public good supply are optimal for itself, given those of the other region. After examining the conditions for the existence of a NCFE, its efficiency properties are considered. Pareto efficient tax levels are computed and compared with the NCFE ones, showing the sources and nature of fiscal externalities. Finally, it is established that, in this model, fiscal choices that are Pareto improving with respect to a NCFE never reduce the taxes in both regions, and always increase the tax of a tax importing region.     

Fiscal policies, environmental pollution and economic growth

This paper develops a model of endogenous economic growth with special consideration to the role of productive public expenditure and environmental pollution; and analyses the properties of optimal fiscal policy in the steady state growth equilibrium. We consider the level of consumption as the source of pollution. Government allocates its tax revenue between pollution abatement expenditure and productive public expenditure. Optimum ratio of productive public expenditure to national income is equal to the competitive output share of the public input, when productive public expenditure is depicted as tax revenue minus abatement expenditure. However, the proportional income tax rate exceeds the competitive output share of the public input. There is no conflict between the social welfare maximizing solution and the growth rate maximizing solution in the steady state growth equilibrium. The unique steady state growth equilibrium appears to be a saddle-point when the growth rate is above a critical level and the steady state equilibrium growth rate in the market economy is not necessarily lower than the socially efficient growth rate.     

Tax Base and Crowding‐in Effects of Balanced Budget Fiscal Policy

A dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax‐financed increase in government expenditures can lower the tax rate through a demand‐induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending.