Optimal time-consistent fiscal policy under endogenous growth with elastic labor supply

We explore the implications of incorporating an elastic labor supply in an endogenous growth economy when characterizing the time-consistent Markov policy. We consider two policy instruments: an income tax rate and the split of government spending between consumption and production services. The Markov-perfect policy implies a higher income tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint on the part of the government. As a consequence, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. Under the Markov and Ramsey optimal policies, a higher weight of leisure in households' preferences leads to a lower optimal income tax rate and a lower proportion of public resources devoted to consumption. We also show that the policy bias that would arise when imposing a Markov policy designed ignoring the presence of leisure in the utility function would lead to a significant welfare loss.     

A Synthesis of Contour and Flexible Wage Hypotheses

Economic instability has risen in emerging economies after capital account liberalization. A more progressive income tax policy could offer a stabilizing alternative. It could result in more revenue, more countercyclical policy, and more income equality and thus more stable demand growth. We test the effects of progressive taxes on stability using univariate and multivariate analyses based on panel data for emerging economies from 1982 to 2002 and compare those to the effects of a value added tax (VAT). We also consider possible constraints on tax policy design, such as government spending, international tax competition, and openness. Progressive taxes are associated with greater income equality and a higher likelihood of countercyclical fiscal policies. The potential benefits from progressive income taxation, though, are lower with VAT. Tax policy is also constrained by government expenditures and openness, but not by lower corporate taxes, suggesting that all income tax rates are constrained by openness.     

The Tax Man Cometh: Constitutional Principles for Tax Enforcement

Passage of an Internal Revenue Service (IRS) overhaul bill in 1998 reflects the depth of American taxpayer frustration with the agency. We bring a constitutional, or rules of the game, perspective to tax enforcement. We examine political costs and benefits and agency discretion as reasons why tax enforcement by the government might deviate from the preferences of a representative citizen. We also examine prospects for reform. Lasting reform must alter the rules for deciding tax enforcement policy or the political pressures which yield excessive enforcement today will reemerge in the future.     

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.     

The Political Economy of the IRS

This paper tests a multiple principal–agent model of the Internal Revenue Service. Using data for 33 IRS districts over six tax years, 1992–1997, we report evidence that the fraction of individual income tax returns audited is significantly lower in districts that are important to the president electorally and that have representation on key congressional committees. These findings suggest that the IRS is not a rogue government agency, but rather is an effective bureaucratic agent of its political sponsors. "Reforming" the IRS by subjecting it to an independent oversight board appointed by the president would therefore seem to be redundant.     

Optimal mixed taxation,credit constraints,and the timing of income tax reporting

We study optimal income and commodity tax policy with credit‐constrained low‐income households. Workers receive an even flow of income during the tax year, but report their incomes and make tax payments (receive transfers) at the end of the year. They spend their disposable income on multiple commodities over the year. We show that differentiated subsidies on commodities can be optimal even if the Atkinson–Stiglitz Theorem conditions apply. When the optimal policy leaves low‐income households with binding credit constraints, it may be optimal to subsidize differentially the good that they consume in higher proportion. Uniform subsidies would also relax the credit constraint, but would be more costly to the government since they would equally benefit unconstrained households. Numerical examples suggest that commodity tax differentiation increases with basic needs and with the interest rate at which government borrows.     

Government financing in an endogenous growth model with financial market restrictions

Summary. In this paper, we develop an endogenous growth model with market regulations on explicitly modeled financial intermediaries to examine the effects of alternative government financing schemes on growth, inflation, and welfare. In the presence of binding regulation, there is always a unique equilibrium. We perform four alternative policy experiments; a change in the seigniorage tax rate, a change in the seigniorage tax base, a change in the income tax and a change in the fiscal-monetary policy mix. We find that in the presence of binding legal reserve requirements, a marginal increase in government spending need not result in a reduction in the rate of economic growth if it is financed with an increase in the seigniorage tax rate. Raising the seigniorage tax base by means of an increase in the reserve requirement retards growth and it has an ambiguous effect on inflation. An increase in income tax financed government spending also suppresses growth and raises inflation although not to the extent that the required seigniorage tax rate alternative would. Switching from seigniorage to income taxation as a source of government finance is growth reducing but deflationary. From a welfare perspective, the least distortionary way of financing an increase in the government spending requirements is by means of a marginal increase in the seigniorage tax rate. Under the specification of logarithmic preferences, the optimal tax structure is indeterminate. Received: March 20, 2000; revised version: June 26, 2001     

The optimal linear income tax with tax credits contingent on fertility

The literature on the optimal linear income tax is extended by incorporating tax credits contingent on the number of dependents the taxpayer is responsible for. The choice over how many dependents to be responsible for is made endogenous by allowing taxpayers a choice over their own fertility. Formulae are derived governing the government's optimal choice of the labor income tax rate and the tax credit contingent on fertility. It is also shown that if the government chooses its policy based on the belief that fertility behavior is exogenous when it is actually endogenous, then a suboptimal policy will be chosen. If certain conditions are fulfilled the government will choose a labor income tax rate lower than that which is actually optimal.     

Is the Optimal Labor Income Tax Progressive in a Unionized Economy?*

This paper concerns optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work. The purpose is to study the determinants of tax progression. We show that the optimal degree of progression of the labor income tax depends on the extent to which the government can influence the wage rate via tax policy as well as on its ability to redistribute income across individuals. In addition, the argument for progressive labor income taxation depends on whether hours of work are chosen by the employed themselves or the union.     

Markets as beneficial constraints on the government

We study the role of anonymous markets in which trades cannot be monitored by the government. We adopt a Mirrlees approach to analyze economies in which agents have private information and a benevolent government controls optimal redistributive tax policy. While unrestricted access to anonymous markets reduces the set of policy instruments available to the government, it also limits the scope of inefficient redistributive policies when the government lacks commitment. Indeed, the restrictions that anonymous markets impose on the optimal fiscal policy, especially on capital taxation and the history-dependence of income taxation, can have positive welfare effects in this case.     

The Efficiency of State Taxes on Mobile Labour Income

We model a federation where States levy a tax on the wage income of mobile citizens who shop between States for their preferred tax and public policy package. It is shown that competition between States results in efficient State spending but that the taxes on wage income are inefficient in the sense that mobile taxpayers are allocated inefficiently across States. The implication is that if States tax the wage income of mobile workers, there may be benefits from policy competition (a more competitive federal system) but also costs associated with the inefficiency. The central government can correct for the inefficiency, but this requires a complex system of inter-State transfers that are difficult to implement in practice.     

Tax Evasion and the Time Consistency of the Government's Income Tax Policy

It is shown that it is not necessarily optimal for the government to tax capital income at a high rate even when capital is in fixed supply because the supply of capital for tax purposes may be elastic if capital income tax evasion occurs. An example is given where the wage tax rate is positive and greater than the interest income tax rate even though capital is in fixed supply. Conditions are also derived under which the capital income tax rate is lower in the closed-loop policy game, where capital is fixed, than in the open-loop game, where it is not.
JEL Classification Numbers: E61, H26.     

Social Comparisons and Optimal Taxation in a Small Open Economy

In this paper, we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption. The main results crucially depend on whether the government can tax returns on savings abroad. If the government can use flexible residence‐based capital income taxes, then the optimal policy rules from a closed economy largely carry over to the case of a small open economy. If it cannot, then capital income taxes become completely ineffective. The labor income taxes must then indirectly also reflect the corrective purpose that the absent capital income tax would have had.     

政府阶段性政策偏好对税收公平的影响

我国政府在改革开放之初与社会主义市场经济秩序基本建立的两个不同发展阶段,选择了不同的企业所得税政策偏好,通过企业身份设计、税率和优惠措施安排,在促进经济发展同时,对税收公平也产生了程度不一的侵蚀。但政府阶段性政策偏好对税收公平的侵蚀并不具有当然的合理性,在企业所得税法中必须做出精当的制度设计,尽可能减轻或减缓政策偏好对税收公平的侵蚀。     

Optimal nonlinear income taxation with learning-by-doing

This paper examines a two-period model of optimal nonlinear income taxation with learning-by-doing, in which second-period wages are an increasing function of first-period labour supply. We consider the cases when the government can and cannot commit to its second-period tax policy. In both cases, the canonical Mirrlees/Stiglitz results regarding optimal marginal tax rates generally no longer apply. In particular, if the government cannot commit and each consumer's skill-type is revealed, it is optimal to distort the high-skill type's labour supply downwards through a positive marginal tax rate to relax an incentive-compatibility constraint. Our analysis therefore identifies a setting in which a positive marginal tax rate on the highest-skill individual can be justified, despite its depressing effect on both labour supply and wages.     

The dual nature of public goods and congestion: the role of fiscal policy revisited

Abstract The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption‐based instruments in conjunction with the income tax. An income tax‐financed increase in government spending dominates both lump‐sum and consumption tax‐financing. Replacing the lump‐sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.     

Optimal fiscal policy in an endogenous growth model with public capital: a note

This note presents an investigation of the optimal tax rule in endogenous growth models with public capital. It is presumed that the government levies only an income tax in addition to financing public investment. Furthermore, a household’s saving is deducted from the income tax. We find the optimal tax rule whereby the social optimum is attainable. The manner by which a government imposes a tax on income and administers tax deductions is important for attaining a socially optimal situation.      

慈善捐赠税收激励原理及效应探析

慈善捐赠被视为调节贫富差距的平衡器,税收政策是国家直接掌握的刚性调节手段,世界各国都制定相应的税收政策激励慈善捐赠。运用税收政策促进慈善捐赠主要基于弥补公共品政府缺位、有限政府理论和帕累托改进理论。税收政策通过改变慈善捐赠的相对价格产生的收入效应和替代效应,促进捐赠数额的增加。     

An alternative approach to income taxation

We take an alternative approach to income taxation in this paper. We view the income tax schedule as the outcome of a voting process, rather than the optimal choice of a “benevolent social planner”. We show that it is very likely for majority voting to lead to the adoption of a regressive income tax schedule, depending on the per capita government revenue requirement and the mean productivity of the population, which is in sharp contrast with the result derived from the traditional “benevolent social planner” approach to income taxation; and that given the adoption of a regressive income tax schedule, the income tax schedule would become less regressive as the ratio of the per capita government revenue requirement over the mean productivity of the population increases. Our work might shed some light on both the prevalent adoption of regressive state tax systems and the cross-state difference in terms of tax systems.     

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.