Income taxes, spending composition and long-run growth

The focus of this paper is threefold. First, it reexamines the impact on long-run growth of changes in flat-rate income taxes when a fraction of total government expenditures is used to provide public services that affect the productivity of privately held inputs. Second, for a given tax policy, this paper studies the impact of government expenditure composition on the rate of economic growth. Third, since demographics follow an overlapping generations structure and fiscal policy affects the economy's productivity, the paper features the role of productivity as a means of redistributing income across generations. The economy is analyzed numerically and policy experiments are carried out.     

Income taxes and the timing of marital decisions

"In this paper we estimate the impact of the [U.S.] federal individual income tax on the timing of marital decisions.... Using household data from the Panel Study on Income Dynamics, we estimate various models of the probability of delaying marriage as a function of the change in tax burden caused by marriage (as well as several other variables). We find that there is a significant positive relationship between the marriage penalty in a year and the probability of delaying marriage until the following year. The magnitude of the effect, however, is small."     

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.     

Campaigning for retirement: State teacher union campaign contributions and pension generosity

Since Tullock (1972) first asked why there is so little money in U.S. politics, several studies have found evidence that political activism has the potential to yield significant returns. This study is the first to directly investigate the returns to public sector union activism by leveraging a transactions-level dataset from the National Institute on Money in Politics to estimate the relationship between teachers' union campaign contributions and the generosity of teacher pension systems. Our results show that more politically engaged teachers’ unions, as evidenced by their aggregate campaign contributions, are successful at both securing a higher level of retirement benefits and at shifting a greater burden of the financing of those benefits to the sponsoring government. Our estimates are in line with recent related studies and imply an investment return on campaign contributions of nearly 1500%.     

Income taxes and the income velocity of money: An empirical analysis

From 1981iv to 1983ii, the growth rate of the income velocity of money declined sharoly. Almost all forecasts of this rate based on standard models overpredicted the velocity growth rate over this period. In this paper it is argued that income taxes exert a direct and discernible influence on velocity of money which has not been recognized by these models. As a result, most models failed to capture the 1981–1983 Reagan tax cuts and, consequently, overpredicted the velocity growth rate in this period. It is shown that the tax-velocity hypothesis is supported by the results of an empirical test. It is also shown that the inclusion of taxes in a model of velocity helps alleviate the overprediction of the velocity growth rate in the 1981–1983 period.     

Income taxes and entrepreneurial choice: empirical evidence from two German natural experiments

Does tax policy affect entrepreneurial choice? We use two tax reforms in Germany as “natural experiments”. These reforms reduced the marginal income tax rate for entrepreneurs with income above a certain threshold, with the exception of freelance professionals. The two conditions for belonging to the treatment group allow us to apply a “difference-in-difference-in-difference” identification strategy to estimate the effects of the tax rate reductions. We base our analysis on the microcensus, the official representative continuous household survey in Germany. The results indicate that the tax rate reductions increased the probability of choosing self-employment.     

Birth,death and taxes

"This paper analyzes the effects of lump-sum tax policy in an overlapping generations model in which consumers have uncertain longevity. It extends previous analyses by considering the case in which private insurance arrangements are actuarially unfair. In addition, it considers the polar case of actuarially fair insurance and the polar case of no insurance. A general condition for debt neutrality is derived. This condition depends explicitly on the degree of actuarial unfairness in insurance and on the extent to which parents care about the utility of their children."     

Estate taxes, consumption externalities, and altruism

We study how the introduction of consumption externalities affects the optimality of the dynamic equilibrium in an economy displaying dynastic altruism. When the bequest motive is inoperative consumption externalities affect the intertemporal margin between young and old consumption and thus modify the intertemporal path of aggregate consumption and capital. The optimal tax policy that solves this intertemporal suboptimality consists of a tax on capital income and a pay-as-you-go social security system. The latter solves the excess of capital accumulation due to the inoperativeness of the bequest motive and the former solves the suboptimal allocation of consumption due to consumption externalities. When the bequest motive is operative consumption externalities only cause an intratemporal misallocation of consumption but do not affect the optimality of the capital stock level. This suboptimal allocation of consumption implies in turn that the path of bequest deviates also from optimality. The optimal tax policy in this case consists of an estate tax and a capital income tax.     

TRIMs, environmental taxes, and foreign investment

Various second-best policy mixes of investment measures and environmental taxes for a polluted, small open economy with foreign capital and immovable trade restrictions are examined. The optimal policy mix depends on the types of trade restrictions. When tariffs are in place, strict policies of pollution taxes and export requirements are optimal for alleviating tariff-induced consumption and production distortions. When involuntary quotas are used in lieu of tariffs, however, the optimal policy mix is a zero export requirement and Pigouvian taxes on pollution. For the case of VERs, however, the optimal policy demands export requirements and a less stringent pollution tax.
TRIMs, impôts environnementaux et investissement étranger. Ce mémoire examine certains ensembles de politiques de second-ordre portant sur l'investissement et les impôts environnementaux dans une petite économie ouverte polluée où il y a capital étranger et restrictions au commerce international. Quand on a des droits de douane en place, des politiques de fiscalité environnementale et d'exportations requises sont optimales pour corriger les distorsions aux patterns de production et de consommation engendrées par les droits de douane. Cependant quand des contingentements involontaires sont en place plutôt que des droits de douane, le mélange optimal de politiques est de ne pas requérir d'exportation mais d'imposer des taxes à la Pigou sur la pollution. Pour ce qui est des restrictions volontaires à l'exportation, le mélange optimal de politiques réclame une taxe moins forte sur la pollution accompagnée par un certain niveau d'exportation requis.     

Redistribution,taxes, and the median voter

We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the “bang-bang” property.     

Unions, progressive taxes, and education subsidies

Progressive income taxes moderate distortionary wage demands by trade unions and thereby reduce unemployment, and at the same time underlie disincentives to acquire skills and decrease labour productivity. Governments can respond by combining progressive taxes with subsidies to investment in human capital. A system of generous education subsidies and steep progressive tax rates is more likely to emerge, the greater the market power of trade unions and the better the ability of governments to influence private education decisions. Empirical analysis for several OECD countries provides results consistent with these propositions. A policy mix of high education subsidies and relatively progressive income taxes is found in countries where union membership is significant.     

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 goods provision,inequality and taxes

The impact of redistributive policies on voluntary contributions is still not well understood. While a higher level of redistributive taxation decreases the price of voluntary giving, it also changes the income distribution by decreasing income inequality. This paper provides a controlled laboratory experiment to investigate the net impact of the tax rate on public goods provision. The experimental findings show that while the participants decrease their voluntary contributions as the pre-tax income distribution becomes more equal, they increase their contributions with taxation. These findings have important implications for government policies regarding privately provided public goods.     

Debt policy, corporate taxes, and discount rates

This paper applies the standard risk-neutral valuation framework to tax shields generated by dynamic debt policies. We derive a partial differential equation (PDE) for the value of the debt tax shield. For a class of dynamic debt policies that depend on the asset's free cash flows, value, and past performance, we obtain closed-form solutions for the PDE. We also derive the tax-adjusted cost of capital for free cash flows and analyze the conditions under which the weighted average cost of capital is an appropriate discount rate. Finally, we derive closed-form solutions for equity betas, which differ from the formulas that have traditionally been used to lever and unlever equity betas.     

Excise taxes,over-shifting,cross-elasticity,and tax revenue

This article examines cross-elasticity effects in excise taxation for markets characterized by monopolistic competition and over-shifting. Extending the constant elasticity demand model to consider cross-elasticity leads to notably different results regarding tax revenue maximization. With nonzero but weak cross-elasticity effects relative to the price elasticity, we derive a higher optimal tax-price ratio compared to prior research. With strong cross-elasticity, revenue can continually be increased by raising the excise tax. Overall, the study offers government greater incentive to use excise taxes to obtain revenue.     

Migration and pension

"Migration has important implications for the financial soundness of the pension system.... While it is common sense to expect that young migrants, even if low-skilled, can help society pay the benefits to the currently elderly, it may nevertheless be reasonable to argue that these migrants would adversely affect current young since, after all, the migrants are net beneficiaries of the welfare state. In contrast to the adverse effects of low skilled migration in a static model, [the authors] show that in a Samuelsonian overlapping generations model...migration is a Pareto-improving measure. All the existing income (low and high) and age (young and old) groups living at the time of the migrant's arrival would be better off."