Tax rate uncertainty,labor supply and saving in a nonexpected utility maximizing model

The effects of uncertainty in rate of return tax rate, wage income tax rate and a comprehensive tax rate which affects both return to saving and wage income are analyzed in a nonexpected utility maximizing framework of Selden (1978). We consider a two period model where the agent works and saves. The effect of rate of return tax rate uncertainty on labor supply and saving critically depends on the magnitude of the elasticity of intertemporal substitution. A wage income tax rate uncertainty on the other hand unambiguously raises work effort while its effect on saving again depends on the magnitude of the intertemporal substitution elasticity. For empirically plausible magnitudes of the intertemporal substitution elasticity, saving responds positively to wage income tax rate risk. The effect of a comprehensive tax rate uncertainty on labor supply and saving, however, depends solely on the magnitude of the elasticity of intertemporal substitution.     

Labor supply responses to the 1990s Japanese tax reforms

The consumption-leisure choice model implies that an exogenous change in tax rates will induce a change in labor supply. This implication is expected to be important to labor supplied by secondary earners under a progressive tax system when spousal income alters effective marginal tax rates. This paper examines labor supply responses to the income tax changes associated with Japanese tax reforms during the 1990s. The results indicate that the hours-of-work elasticity with respect to the net-of-tax rate is 0.8 for married women.     

Tax enforcement,technology, and the informal sector

Theoretical models of the informal sector mostly assume—or end up with—a positive correlation between a measure of taxes and the size of the informal sector. However, some recent empirical studies associate higher taxes with a smaller informal sector size. In this paper, we build a theoretical framework—an extension to a two-sector growth model—which allows us to unravel the negative correlation between informal sector size and taxes. We find that (a) a higher degree of tax enforcement, (b) a higher productivity of formal sector households, and (c) a lower physical capital depreciation rate make for a negative relation between these variables. Our results suggest that enforcement and technological factors are likely candidates to account for this relationship.     

Evolution of preferences and cross-country differences in time devoted to market work

I model the hypothesis that preferences evolve and permanent differences in individual attitudes towards work emerge between two countries characterized initially by identical preferences as a result of a period in which only one of the two countries is subject to regulations constraining labor supply, or as a by-product of different tax rates on labor income. Hence, the elimination of these regulations may not allow the economy thus deregulated to converge to the same hours of market work per person of the other economy, and the long-run differential in market work between economies subject to different tax rates is amplified.     

Factor taxation and labor supply in a dynamic one-sector growth model

This paper studies a class of AK-type growth models with factor income taxes, public capital stock and labor–leisure trade offs. While a higher capital tax rate reduces economic growth in the short run, the long-term growth effect is ambiguous and remains ambiguous even if the level of tax rate is larger than the degree of government externality. A higher labor income tax rate has ambiguous growth effects both in the short and long runs. However, if the intertemporal elasticity of substitution for labor supply is sufficiently small, a higher labor tax rate always lowers economic growth in the long run, despite the existence of productive government taxation.     

Long-run growth and welfare effects of public policies with distortionary taxation

In a one-sector growth model with infrastructure investment, we study the impact of fiscal policies on growth. The government collects taxes on labor income and profits. The government uses these revenues to purchase infrastructure investment, provide utility enhancing government services, and to provide transfer payments to the households. We show that the balanced growth rate is an increasing function of the percent of government revenues that goes to infrastructure. We find that the growth maximizing mix of taxes depends on the elasticity of substitution between inputs. In particular, with distortionary taxes, the growth maximizing tax rate on capital is higher the lower the elasticity of substitution between private physical capital and public capital. In addition, the growth maximizing size of the government is higher when the elasticity of substitution between public and private inputs is low. We also investigate welfare effects of other public expenditures as well. Depending on the elasticity of substitution in production, the welfare implications of different public policies can be substantial.     

THE IMPACT OF LABOR MARKET REGULATION ON EMPLOYMENT IN LOW‐INCOME COUNTRIES: A META‐ANALYSIS

Controversy over labor market policy often centers on achieving a balance between preventing worker exploitation, and avoiding loss of productivity or employment through excessive regulation. Although the literature documenting the impact of labor market regulation on employment is extensive, there is a dearth of evidence on the impact of such policies in low‐income countries (LICs). Since it is easier for workers, especially women, to slip into the informal sector in LICs, regulations are likely to have stronger impacts on formal employment in these countries (but lower impacts on unemployment). We systematically reviewed available research from countries that are, or were until recently, LICs. Most studies document that more stringent labor regulations are associated with lower formal sector employment and higher informal sector employment. We also conducted a metaregression analysis of the impact of minimum wages on formal and informal employment. After controlling for publication bias, higher minimum wages are associated with lower formal employment and a higher share of informal workers.     

Factor substitution and taxation in a finance constrained economy

In this paper, we examine the effects of constant-rate factor taxation on macroeconomic stability in the Woodford (1986) model. Our focus is on how the degree of factor substitution, as measured by the elasticity of factor substitution (EOS) in production, affects different balanced-budget tax rules. Analytically, we show that indeterminacy can occur under capital income taxation only when the EOS is very low, whereas indeterminacy under labor income taxation is not subject to the EOS restriction. This finding is robust when we tax all of the factor incomes with equal rates. Thus, in terms of macroeconomic stability, taxing capital income is preferred to taxing labor income.     

TAX COMPETITION AS A CAUSE OF FALLING CORPORATE INCOME TAX RATES: A SURVEY OF EMPIRICAL LITERATURE

Abstract Since the mid 1980s, tax rates on corporate income have declined in most industrialized countries. Tax competition between countries for mobile capital has frequently been mentioned as an explanation for this development. A vast empirical literature dealing with tax competition for mobile capital has emerged. This paper categorizes and summarizes the existing empirical studies on this issue. Particular focus is placed on the isolation of the substantive implications the quantitative study outcomes convey. Given the empirical evidence surveyed, it appears that tax rates indeed decline due to tax competition between countries, and in particular due to competition for profits. In addition to summarizing the substantive implications of the existing empirical literature, the paper addresses the question of whether the existing studies can convincingly isolate tax competition as a driver of falling corporate income tax rates.     

Heterogeneity and long-run changes in aggregate hours and the labor wedge

From 1961 to 2007, U.S. aggregate hours worked increased and the labor wedge—measured as the discrepancy between a representative household׳s marginal rate of substitution and the marginal product of labor—declined substantially. The labor wedge is negatively related to hours and is often attributed to labor income taxes. However, U.S. labor income taxes increased since 1961. We examine a model with gender and marital status heterogeneity which accounts for the trends in the U.S. hours and the labor wedge. Apart from taxes, the model׳s labor wedge reflects non-distortionary cross-sectional differences in households׳ hours worked and productivity. We provide evidence that household heterogeneity is important for long-run changes in labor wedges and hours in other OECD economies.     

Flat tax reform: A quantitative exploration

This paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the U.S. is replaced by a flat tax, as proposed by Hall and Rabushka (1995), (The Flat Tax, 2nd ed. Hoover). The central aspects of such reform, the impact of tax reform on capital accumulation and labor supply, as well as its distributional consequences, are analyzed in a dynamic general equilibrium model. Main results are that, (i) the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation; (ii) mean labor hours are relatively constant across tax systems, but aggregate labor in efficiency units increases; (iii) in all circumstances analyzed, the distributions of earnings, income and especially wealth become more concentrated.     

Tax smoothing in a business cycle model with capital-skill complementarity

This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity and endogenous skill acquisition under technology and public expenditure shocks. We find that skilled and unskilled labour tax smoothing maintain quantitatively under externalities and exogenous shocks in skill acquisition, as well as when the relative skill supply is exogenously determined. We further find that the government finds it optimal to reduce both the size of the wedge between the marginal rates of substitution and transformation in skill attainment in the long-run and the standard deviation of this wedge over the business cycle. This is achieved by subsidising skill creation and taxing both types of labour income.     

Capital–labor substitution and equilibrium indeterminacy

This paper examines the quantitative relationship between the elasticity of capital–labor substitution in production and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy. However, when capital utilization is constant, a below-unity substitution elasticity sharply raises the minimum degree of increasing returns because it imposes a higher effective adjustment cost on labor hours. Overall, our results show that empirically-plausible departures from the Cobb–Douglas production specification can make indeterminacy more difficult to achieve.     

The asymmetric response of the economy to tax changes before and after 1980

This paper explores the asymmetry in the response of GDP to tax shocks before and after 1980 as first noted in Romer and Romer (2010). I find that there are two main reasons why output responds more strongly to tax shocks before 1980 than after. First, a greater sensitivity of the effect of tax shocks on output to the state of the economy before 1980 explains about half of the difference between periods. Second, before 1980 the effect of tax shocks on households is indirect and lowers total personal income and nondurable goods consumption. After 1980 tax shocks affect personal tax payments directly, causing disposable income and savings to change. This finding affirms Romer and Romer’s hypothesis that households are more likely to consumption smooth. However, I find that households after 1980 consumption smooth in response to a change in their direct tax burden not, as Romer and Romer posit, because they have greater access to financial services.     

On the Ramsey equilibrium with heterogeneous consumers and endogenous labor supply

In this paper, we address the stability issue, stressing the role of labor supply, in a Ramsey model with heterogeneous households subject to borrowing constraints. Making labor supply endogenous leads us to prove the existence of two kinds of steady state: the one where everybody supplies labor, the other where only the most patient agent refrains from working. Going beyond models with inelastic labor supply, we show how preferences of impatient agents affect the saddle-path stability of each type of steady state and the occurrence of endogenous cycles. When their elasticity of intertemporal substitution in consumption exceeds one, instability and cycles are less likely, requiring lower degrees of capital-labor substitution. Conversely, elasticity values below one promote the emergence of fluctuations. We end the paper by showing the existence of the intertemporal equilibrium under market incompleteness, using a local approach based on the first-order conditions.     

The long run effects of changes in tax progressivity

This paper compares the steady-state outcomes of revenue-neutral changes to the progressivity of the tax schedule. Our economy features heterogeneous households who differ in their preferences and permanent labor productivities, but it does not have idiosyncratic risk. We find that increases in the progressivity of the tax schedule are associated with long-run distributions with greater aggregate income, wealth, and labor input. Average hours generally declines as the tax schedule becomes more progressive implying that the economy substitutes away from less-productive workers toward more-productive workers. Finally, as progressivity increases, income inequality is reduced and wealth inequality rises. Many of these results are qualitatively different than those found in models with idiosyncratic risk, and therefore suggest closer attention should be paid to modeling the insurance opportunities of households.     

Coordination of capital taxation among asymmetric countries

This paper studies international fiscal coordination in a world of integrated markets and sovereign national governments. Mobile capital and immobile labor are taxed in order to finance a fixed budget. This generates productive inefficiency. Two fiscal reforms are considered: a minimum capital tax level and a tax range, i.e., a minimum plus a maximum capital tax level. It is shown that the introduction of a lower bound to the capital tax level is never preferred to fiscal competition by all countries while there always exists a combination of both a lower and an upper bound (i.e., a tax range) which is unanimously accepted.     

Regression‐Kink Approach for Wage Effect on Male Work Hours

In finding the effect of after‐tax wage rate on work hours, the main difficulty is the endogeneity of after‐tax wage rate that equals ‘one minus average tax rate’ times wage rate. To overcome this endogeneity problem, we take advantage of jumps in the marginal income tax rate, which is a regression discontinuity (RD) idea. This RD, in turn, makes the average income tax rate ‘kink‐continuous’, which is a regression kink (RK) idea. We provide a simple economic model resulting in the RD and RK features, explain how to implement RK in practice, and then apply our methods to Korean male data. Our main RK‐based labour supply elasticity estimate 7.16% turned out to be insignificant with t‐value 1.52, but it is much larger than most estimates in the literature. This may be attributed to, among other things, the facts that the RK instrument is unique, that RK identifies only the local elasticity at the kink point and that RK requires large data as regression derivatives are estimated.     

Income taxes and urban spatial structure

This paper examines the impact of an income tax in a monocentric city where households equilibriate their allocation of time between work, commuting, and leisure. An increase in the income tax rate lowers the implicit value of time, and hence transportation costs. “Compensated equilibrium” comparative statics analysis shows that under certain conditions, this results in a larger, more dispersed urban area, with lower land rents at the city center and less population within any given distance from the center. The welfare effect of an income tax rate change is also studied, and an expression for the marginal excess burden is derived. The income tax produces welfare losses both because it induces substitution in favor of leisure and in favor of travel—the latter accompanied by excessive spatial dispersion and consumption of space. The marginal excess burden depends not only on the compensated demand elasticity for leisure, but also on that for space. Finally, the problem of benefit measurement for transportation projects in this tax-distorted spatial economy is examined. Benefit measures should be deflated to adjust for the fact that further transportation improvements lead to reduction of land use intensity, exacerbating the problem of spatial resource misallocation in an already excessively dispersed urban area.     

On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city

This paper examines congestion taxes in a monocentric city with pre-existing labor taxation. When road toll revenue is used to finance labor tax cuts, 35% of the optimal road tax in our numerical model does not reflect marginal external congestion costs, but rather functions as a Ramsey–Mirrlees tax, i.e. an efficiency enhancing mechanism allowing for an indirect spatial differentiation of the labor tax. This adds a quite different motivation to road pricing, since welfare gains can be produced even in absence of congestion. We find that the optimal road tax is non-monotonic across space, reflecting the different impacts of labor supply elasticity and marginal utility of income, which both vary over space. The relative efficiencies of some archetype second-best pricing schemes (cordon toll, flat kilometer tax) are high (84% and 70% respectively). When road toll revenue is recycled lump-sum, the optimal toll lies below its Pigouvian level. Extensions in a bimodal framework show that the optimality of using road toll revenue to subsidize public transport depends on the initial inefficiency in public transport pricing.