Optimal income taxation and social norms in the labor market

This paper concerns optimal income taxation in a two-type model extended to allow for social interaction and social norms in the labor market. One norm refers to “normal behavior” with respect to work hours (the hours of work norm), whereas another means that “one should earn one’s living by working” (the participation norm). The results show how the hours of work norm gives rise to a corrective motive for using income taxation. We also show how the interaction between the hours of work norm and the private incentive to participate in the labor market (which reflects the participation norm) gives rise to an employment motive for using the income tax.     

Globalisation squeezes the public sector—is it so obvious?

It is widely perceived that globalization squeezes public sector activities by making taxation more costly. This is attributed to increased factor mobility and to a more elastic labour demand due to improved scope for relocation of production, and thus employment across countries. We argue that this consensus view overlooks that gains from trade unambiguously work to lower the marginal costs of public funds. Moreover, we argue that a more elastic labour demand may actually reduce the marginal costs of labour income taxation and that globalization may actually reduce the labour demand elasticity.     

Sickness absence and health care in an economic federation

This paper addresses vertical fiscal externalities in a model where the state governments provide health care and the federal government provides a sickness benefit. Both levels of government tax labor income and policy decisions affect labor income as well as participation in the labor market. The results show that the vertical externality affecting the state governments’ policy decisions can be either positive or negative depending on, among other things, the wage elasticity of labor supply and the marginal product of expenditure on health care. Moreover, it is proved that the vertical fiscal externality will not vanish by assigning all powers of taxation to the states.      

Information Sharing and International Taxation: A Primer

The sharing between national tax authorities of taxpayer-specific information has emerged over the last few years as a—probably ‘the’—central issue on the international tax policy agenda. Yet this refocusing of the debate on international taxation—away from parametric tax coordination and towards strengthening information exchange—has gone largely unnoticed in the public finance literature. This paper gives an overview of this increasingly important area of international taxation, reviewing the key economic, legal, and practical concepts and issues bearing on the analysis and implementation of information exchange, and providing an account of recent policy initiatives and emerging theoretical insights. JEL Code: H77, H87, F42     

Pawns and queens revisited: public provision of private goods when individuals make mistakes

This paper analyses the optimal tax policy and public provision of private goods when the government is paternalistic and has a redistributive objective. When individuals only differ with respect to their income-earning abilities, the publicly-provided goods should be overprovided, relative to the decentralised optimum, if society’s marginal valuation of them exceeds the individual valuation and if these goods are complements to labour supply. However, when the individuals also differ in terms of their valuation of the publicly-provided good, this simple conclusion does not hold. Optimal marginal income tax rates are shown to differ from the standard rules if publicly-provided goods and labour supply are related.      

Labor tax reform, unemployment, and search

A key obstacle to reducing payroll taxes in many industrialized and transition countries is the direct revenue loss to the government that it implies. This paper studies a simple and practical labor tax reform of reducing a payroll tax and increasing a progressive wage tax that keeps the marginal tax wedge unchanged. Such a strategy increases employment, reduces the equilibrium unemployment rate, and increases public revenue as long as workers do not have all the bargaining power in wage negotiations. Moreover, welfare rises if workers’ bargaining power is sufficiently large to exceed a critical value determined by the second-best Hosios condition.      

Concavity of utility,concavity of welfare,and redistribution of income

The marginal social value of income redistribution is understood to depend on both the concavity of individuals’ utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.     

Welfare Policies, Labour Taxation and International Integration

How will international integration affect welfare policies? This paper considers the possibilities of financing public sector activities (public consumption and social security expenses) by general (wage) taxation in an economy which becomes more integrated in international product markets. Even if labour is internationally immobile, the increased mobility of products and hence jobs implies a change in the distortions arising from taxes and social security contributions levied on labour income. Since financing of social security via general taxation involves a common resource problem the effects of international integration depend critically on the institutional structure of the labour market. This paper shows that increased international integration inducing more product market competition implies that it becomes more costly to maintain welfare systems financed by general taxation.     

Agglomeration and regional labour markets

Conclusion There is no such thing as ‘the labour market’. This term is usually used to describe a simplified combination of very different delimited markets, both regionally and in terms of employee qualifications. Different labour markets can develop quite differently. This insight was underlined by studies presented at the DIW Berlin workshop. Thus, the empirical studies are virtually unanimous in showing that those with higher qualifications benefit particularly from a concentration of economic activity. That investment in human capital is worthwhile particularly in regionally concentrated labour markets is, conversely, demonstrated by the theory. The workshop presentations have, nevertheless, also led to a large number of new questions. For example, the basis of each of the various countries’ experiences needs to be clarified. Among the most important tasks to be solved is undoubtedly also the quantification of the influence emanating from the different agglomeration factors. Can economic policy lessons be learned from the workshop contributions? The heterogeneity of labour markets, as has become evident from the different presentations, suggests that labour market policy would be ill advised to rely solely on an overall observation of a labour market seen as an entity. In light of the questions raised, especially as a result of the empirical studies, it nevertheless seems premature to consider conclusions that go any further as anything more than hypotheses.     

The Netherlands: An employment policy role model?

Conclusion While in recent years the level of social security benefits in the Netherlands has been reduced somewhat —whereby to some extent this involved the employers shouldering additional costs (e.g. for disability pensions) —the benefits for unemployment and other social bene-fits remain high in international comparative terms. Despite a slight decline in social benefits as a share of GDP, public sector spending as a whole is, at around 50%, slightly higher than in Germany, although the Netherlands has not had to cope with extraordinary burdens such as have resulted from German unification. The successes achieved by the Netherlands on the labour market have been exaggerated. Firstly, the real level of unemployment is likely to be actually rather high in international terms, at least once one dispenses with a narrow definition and takes account, in particular, of the large number of occupationally disabled. Secondly, the fall in the unemployment rate is far from spectacular. Although the increase in the number of wage and salary earners has been substantially higher in the Netherlands than in west Germany, this in no way represents a comparable increase in the volume of employment—measured in working hours—as the incidence of part-time employment has increased far faster there than in west Germany. The Netherlands has achieved-slightly-higher growth than west Germany. This success is largely due to a very moderate growth of wages and salaries, amounting to a real depreciation of the guilder against the D-Mark, an economic policy strategy that can be successful in a small country, but one which, if applied by a large country such as Germany, would merely initiate a beggar-thy-neighbour race to lower real exchange rates.     

社会保障基金国债投资的规模扩大效应分析

本文通过定性和定量分析方法讨论了社会保障基金投资国债产生的规模扩大效应。模型分析结果表明,该效应与金融市场深度和政府对社保基金国债投资比例的限量监管等因素有关。利用2001至2009年的实证数据分析发现,在当前金融市场发展状况下,如果社保基金大量投资国债,潜在的规模扩大效应将影响养老金系统性改革发挥改善未来年轻一代社会福利的作用。鉴于此,未来应当通过深化金融改革和放松限量监管来避免该问题。     

Tax-tariff reform with costs of tax administration

As is broadly recognised, the straightforward application of the Diamond–Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications for optimal taxation and for desirable directions of tax-tariff reform of taking into account the costs of tax administration in countries at different levels of economic development. The paper clarifies the reasons for, and lends support to, the criticism by Stiglitz (Presentation to Congress of International Institute of Public Finance, Prague, 2003) of the IMF and the World Bank’s recommendation to developing countries to adopt VAT to replace border taxes.      

Price Run-up in Housing Markets,Access to Bank Lending and House Prices in Korea

This paper studies the causal relationship between house prices and the access to bank lending in Kangnam, the hottest submarket in Seoul and four ‘cold’ markets which have shown relatively modest price increases. In response to the rapid escalation of house prices in Seoul, primarily in Kangnam in recent years, the Korean government implemented a number of policies to stabilize house prices. In particular, it introduced more strict limits on loan-to-value ratio and debt-to-income ratio as part of the mortgage loan qualification process in order to restrict the availability of bank lending for the housing market. The short-run influence of the bank lending on the apartment prices is clearly present in ‘cold’ markets, while it is not in Kangnam, the ‘hot’ market, even though the long-run influence is stronger in Kangnam than in the other markets. This result holds for the entire sample period (1999–2006) as well as for the subperiods before and after the introduction of lending restrictions in August, 2005. It also holds for Kangnam and Kangbuk for an extended period of 1988 to 2006. Our results suggest that in the short run the lending restriction may cause a disruption in untargeted housing markets while it has little influence on the apartment prices in the targeted market. We also find that banks have adjusted the bank lending in response to changes in the house prices in Kangnam as well as in the other markets.     

No significant service gap between west Germany and the USA

Conclusions The analyses show that a significant “services gap” does not exist between west Germany and the USA. Such a gap is not even evident in the area of low-skill service activities, such as in catering, once the marginal employment relations — the importance of which is understated by the official statistics — are included. This finding invalidates the empirical basis for economic policy proposals for an expansion of employment in service branches as a way out of the employment crisis. It is evident that a solution to Germany's current employment problems can only be found in a strategy that increases the scope for employment at the macro-economic level, i.e. irrespective of sectoral developments and whatever the implications of this for the distribution of the various types of activity. Having said this, the heavy bias in the output structure of the German economy in favour of industrial output suggests that an additional employment potential does exist in services, especially personal services.     

Reforming the Direct–Indirect Tax Mix

This paper provides a new framework for evaluating the welfare effects of commodity tax reforms. It is shown that tax reforms are welfare improving if and only if they satisfy the following intuitive property: on average, consumer prices fall for commodities with high marginal excess burdens. The rule is then applied to analyze a shift from differentiated commodity taxation to direct flat-rate taxation of labour income. The welfare impact of such reforms can be decomposed into two effects: (i) the increase in welfare associated with substitution among taxed commodities, and (ii) the loss in welfare associated with substitution between commodities and leisure. On balance, a shift towards direct taxation is desirable when inter-commodity substitution effects are large relative to commodity–leisure substitution effects. The analysis allows us to reconcile the apparently conflicting results of the tax reform and optimal taxation literatures.     

Optimal taxation and welfare benefits with monitoring of job search

In order to investigate the interaction between tax policy, welfare benefits, the government technology for monitoring and sanctioning inadequate search, workfare, and externalities from work, we incorporate endogenous job search and involuntary unemployment into a model of optimal nonlinear income taxation. In this setting, the government faces a trade-off between boosting employment of low-skilled agents and raising work effort of high-skilled workers. If sanctions for inadequate search effort can be targeted at high productivity types for whom it is socially optimal to search, the government can afford to levy higher labor taxes on marginal workers without discouraging these agents from seeking work. This allows for lower marginal taxes on work effort of agents with a job. In contrast to workfare, job externalities in the private sector raise marginal tax rates, as the government attaches more importance to boosting employment of low-skilled workers.     

The Effects of Reduced Social Security Contributions on Employment: An Evaluation of the 2003 French Reform*

In 2003, the French government decided to reform the system managing the different minimum wage regulations and the targeted reductions to employers' social security contributions. The main objective of the Fillon reform was to simplify the complex regulations that were created by the progressive introduction of the 35‐hour week. The reform incidentally created large variations in labour costs, depending on the type of firm and the wage level within the firm. This paper presents an evaluation of the impact of this reform on employment using a balanced panel of firms with more than five employees, drawn from a matching between several administrative data sources from 2000 to 2005.     

Tax Holidays and the International Capital Market

The paper shows how a tax holiday may signal to a skepticalcapital market that the future level of taxation will be moderate.After the signal has informed investors that the host countrygovernment is a low-spender, the tax profile flattens out, correspondingto a tax reform stage. Contrary to the recent literature on taxholidays, this model assumes that: the capital market is perfectlycompetitive; sunk costs are captured by a convex cost function,instead of fixed costs; taxation is distortionary, not lump-sum;and the government maximizes a welfare function rather than taxrevenue.     

Beyond the labour income tax wedge: the unemployment-reducing effect of tax progressivity

In this paper, we argue that, for a given overall level of labour income taxation, a more progressive tax schedule increases employment. From a theoretical point of view, higher progressivity increases overall employment through a wage moderating effect and also because employment of low-paid workers is more elastic to wages. We test these theoretical predictions on a panel of 21 OECD countries over 1998–2008. Controlling for the burden of taxation at the average wage, our estimates suggest that a more progressive tax schedule reduces the unemployment rate and increases the employment rate. These findings are confirmed when we account for the potential endogeneity of both average taxation and progressivity. Overall, our results suggest that policy-makers should not only focus on the detrimental effects of tax progressivity on in-work effort, but also consider the employment-enhancing effects.     

Home Price,Time-on-Market,and Seller Heterogeneity Under Changing Market Conditions

This paper develops a formal model to examine the effect of changing market conditions and individuals’ selling constraints on selling price and time-on-market. Using the concept of Relative Liquidity Constraint (RLC)—a stochastic variable that captures the randomness of future individual constraints and market conditions—the study presents the first ex ante analysis that extends the investigation of the issue of seller heterogeneity to the point of the buying decision, that is, from the perspective of the buyer’s (future seller’s) point of view. We show that seller constraint, as well as the uncertainty of such a constraint, significantly depresses the expected selling price and increases risk. Our closed-form formulas provide a set of simple quantitative tools that enable buyers and sellers to adjust the “market average” to their ex ante “individual expectations”.