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.      

The theory of optimal taxation: what is the policy relevance?

The paper discusses the implications of optimal tax theory for the debates on uniform commodity taxation and neutral capital income taxation. While strong administrative and political economy arguments in favor of uniform and neutral taxation remain, recent advances in optimal tax theory suggest that the information needed to implement the differentiated taxation prescribed by optimal tax theory may be easier to obtain than previously believed. The paper also points to the strong similarity between optimal commodity tax rules and the rules for optimal source-based capital income taxation.      

Education policies and optimal taxation

This paper studies the design of education policies in a setting in which optimal redistributive labor taxation is available. It is usually argued that the crucial parameter to guide education policy is the complementarity of education and ability. This is true only when labor supply is fixed or when income taxes are not allowed. I show that, if labor supply is endogenous and if the government can tax income in a nonlinear way, the crucial parameter is how the education elasticity of wage changes with ability. Taking the elasticity criterion into account, education subsidies are optimal in cases in which, under the complementarity criterion, education taxes would be optimal. To do this, I use an asymmetric information setting that motivates nonlinear taxation of income and education. JEL Classification H21 · H23 · H52 · I28     

Redistributive taxation and social insurance under adverse selection in the insurance market

This paper extends the analysis of optimal income taxation under uncertainty studied by Cremer and Pestieau (International Tax and Public Finance, 3, 281–295, 1996). We introduce asymmetric information in the insurance market whereby private insurance companies cannot identify the risk probability of the agents, and we examine its effect on public policy. We consider the separating equilibrium of Rothschild and Stiglitz (Quarterly Journal of Economics, 90, 629–649, 1976) and Riley (Econometrica, 47, 331–359, 1979) where the low risk agent is only partially insured. The presence of the distortion in the insurance market changes the affinity of labor, and in some cases, we show that the scope of redistribution and the resulting social welfare are higher under asymmetric information than under full information. We also show that the increase in social insurance affects the utility and labor incentive of the low risk type by relaxing the self-selection constraint in the insurance market. The policy implications of the redistributive taxation and social insurance are analytically and numerically examined.      

Optimal Fiscal Policy with Consumption Taxation

We characterize optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labor income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policymaker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labor income taxation. Then, we quantify numerically each of these gains by calibrating the model on the U.S. economy.     

Ad Valorem Taxation on Intermediate Goods in Oligopoly

Thepaper compares the efficiency of value added taxation (VAT),in which intermediate goods are not taxed, with that of cascadetaxation, in which they are, when levied on imperfectly-competitivevertically-related industries. One type of commodity taxationis not always superior to the other in terms of welfare. Indeed,when intermediate-goods have close substitutes, VAT is the optimalcommodity tax system. But when input substitutability is weakor absent and input producers have market power, they shouldbe taxed. In fact, in the absence of lump sum taxes and withno input substitutability, it is optimal to tax, not to subsidize,the most monopolistic industry. True cascading, in which bothupstream and downstream industries are taxed, is thus betterthan VAT when, besides no input substitutability and both intermediateand final good producers with market power, the needed revenuerequirement is not small. We therefore submit a rationale forthe coexistence of VAT and cascade taxation.     

Household Production and the Design of the Tax Structure

This paper amalgamates two topical issues in the economics ofcommodity taxation: the general case for non-uniformity, andthe tax treatment of commodities that are either inputs to householdproduction or close substitutes for household produced goods.Assuming a redistributive objective and that the government canimplement a non-linear income tax system and linear commoditytaxes we investigate if the existence of household productiongenerates a natural case for non-uniform commodity taxation.Four main results are reported. First, when the set of commoditiesis partitioned into consumption goods and input goods, and commoditytaxes are restricted to being within-group uniform, the compositecommodity theorem can be used to characterize the optimal commoditytaxes. Secondly, sufficient conditions for within-group uniformcommodity taxes to be fully optimal are derived. Thirdly, weargue that an input good should be taxed at a higher rate thangeneral consumption if and only if the degree of complementarityin household production (between the input good and a time-input)is larger than the degree of complementarity in consumption (betweengeneral consumption and the household produced good). Finally,we show that under simple normality, a market substitute forthe household-produced good should be taxed at a lower rate thangeneral consumption. The intuition for the last two results isthat the suggested pattern of taxation discourages ``do-it-yourself'behaviour, which relaxes the self-selection problem.     

Why Capital Income Taxes Survive in Open Economies: The Role of Multinational Firms

This paper discusses the role of multinational firms and double taxation treaties for corporate income taxation in open economies. We show that it is optimal for a small open economy to levy positive corporate income taxes if multinational firms are taxed according to the full taxation after deduction system or the foreign tax credit system. Positive corporate taxes also occur in the asymmetric case where some countries apply the exemption system and others apply the tax credit system. If all countries apply the exemption system, the optimal corporate income tax is zero. We also show that, under tax competition, corporate income taxes are not necessarily too low from the perspective of the economy as a whole. While the undertaxation result is confirmed for the case of the exemption system, tax rates may also be inefficiently high if the deduction or the credit systems are applied.     

Neutral Property Taxation Under Uncertainty

In a framework where no uncertainty arises, Arnott (J Publ Econ Theor 7:27–50, 2005) investigates a neutral property taxation policy that will not affect a landowner’s choices of capital intensity and timing of development. We investigate the same issue, but allow rents on structures to be stochastic over time. We assume that a regulator implements taxation on capital, vacant land, and post-development property so as to expropriate a certain ratio of pre-tax site value as well as to achieve neutrality. We find that the optimal taxation policy is to tax capital and subsidize properties before and after development. We also investigate how this optimal policy changes in response to changes in several exogenous forces related to demand and supply conditions of the real estate market.

Taxation, Migration, and Pollution

This paper analyzes optimal fiscal, environmental and immigration policy for a single jurisdiction. In the presence of immigration quotas, taxes on the output of externality-producing industries should be higher than indicated by the standard rule for Pigovian corrective taxation. Immigration quotas are not optimal if fiscal instruments can be used to control immigration, and relaxation of immigration quotas generally increases domestic welfare. If optimal taxes are imposed on immigrants, no immigration quota should be imposed, and a version of the traditional Pigovian rule characterizes optimal taxation of domestic externalities. If production in the immigrants' country of origin causes trans-boundary spillovers, domestic welfare can be improved by lighter taxation of immigrants or by further relaxation of immigration quotas. This revised version was published online in July 2006 with corrections to the Cover Date.     

Environmental taxation and the double dividend: A reader's guide

There has been considerable debate as to whether the revenue-neutral substitution of environmental taxes for ordinary income taxes might offer a double dividend: not only (1) improve the environment but also (2) reduce certain costs of the tax system. This paper articulates different notions of double dividend and examines the theoretical and empirical evidence for each. It also connects the double-dividend issue with principles of optimal environmental taxation in a second-best setting.A weak double-dividend claim-that returning tax revenues through cuts in distortionary taxes leads to cost savings relative to the case where revenues are returned lump sum-is easily defended on theoretical grounds and (thankfully) receives wide support from numerical simulations. The stronger versions contend that revenueneutral swaps of environmental taxes for ordinary distortionary taxes involve zero or negative gross costs. Theoretical analyses and numerical results tend to cast doubt on the strong double-dividend claim, although the theoretical case is not air-tight and the numerical evidence is mixed.     

Environmental Policy,Efficient Taxation and Unemployment

In this paper, I consider environmental policy as part of a mixed tax problem with a general income tax and linear commodity taxes. I assume that the wage rate is determined by bargaining between unions and firms. The results show that the change in the number of employed persons, following a change in the use of a tax instrument, affects the optimal tax structure via two channels; (i) it makes the tax revenues available for public expenditures more or less costly to collect, and (ii) it affects the aggregate demand for the good that causes the environmental damage. This means that the use of taxation to counteract the labor market imperfection is not easily separated from the environmental aspects of tax policy.JEL Code: D62, H21, J60     

Imperfect competition and the optimal combination of ad valorem and specific taxation

While it has long been recognized that under imperfect competition ad valorem and specific taxation differ in their effects, the optimal combination of the two instruments has received little attention. This paper shows how combining the two taxes can eliminate the welfare loss due to imperfect competition by inducing profit-maximizing firms to charge the appropriate Ramsey price.     

结合逃税的最优税收理论研究评述

最优税收理论主要研究税制的最优设计问题,而逃税理论主要致力于政府的最优执行问题,最近出现了将这两种理论结合起来的研究趋势。结合逃税的最优税收理论,包括最优所得税和最优商品税等内容,研究结果表明:结合逃税的最优税收理论并不能得出比标准最优税收理论更为明确的政策结论,其还有待于进一步的研究和发展。     

Intangible investment and Ramsey capital taxation

The standard analysis of optimal fiscal policy aggregates different types of assets into a unique capital good and all types of capital taxes into a unique capital tax. This paper considers a disaggregated framework: an economy with corporate and dividend taxes, where firms invest in both tangible and intangible assets (which can be expensed or sweat). In our setup, firms can always respond to changes in the timing of taxation. We find that the optimal long-run policy features zero corporate taxes and positive dividend taxes, with labor and dividend taxes being identical. Moreover, the initial capital levy is relatively small.     

When are origin and destination regimes equivalent?

A series of equivalence results are established which show that a switch from a destination regime of commodity taxation to an origin regime has no real effects. These significantly generalize those in the existing literature. Assuming uniformity of taxes within each country, equivalence applies (1) in a general competitive economy with an arbitrary (finite) number of goods and factors of production, arbitrary factor taxes, and arbitrary transport costs; (2) in an imperfectly competitive economy with any form of imperfect competition and with transport costs; and (3) in monetary economies where there is some price rigidity (such as nominal wage rigidity) as long as the exchange rate is flexible. Conditions under which nonequivalence applies are also identified and discussed.     

Capital taxation and accumulation in a growing world economy with deficit finance

Prior analyses of the incidence of capital taxation have assumed that the government budget is balanced and changes in capital taxes affect either other taxes, transfers, or government expenditures. The general conclusion is that an increase in the capital tax rate will increase the gross-of-tax interest rate and decrease capital accumulation. This article examines the steady-state effects of capital taxation on the gross-of-tax interest rate and capital accumulation within a two-country model of overlapping generations, which allows capital taxation to directly affect government budget deficits. It is shown that, under the residence tax system, if the after-tax-interest rate is greater than the growth rate, an increase in the capital tax rate willdecrease the gross interest rate andincrease the capital-labor ratio. This result holds even under the territorial tax system, with some additional assumptions.     

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.     

Machines,buildings, and optimal dynamic taxes

The effective taxes on capital returns differ depending on capital type in the U.S. tax code. This paper uncovers a novel reason for the optimality of differential capital taxation. We set up a model with two types of capital – equipments and structures – and equipment-skill complementarity. Under a plausible assumption, we show that it is optimal to tax equipments at a higher rate than structures. In a calibrated model, the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state. The welfare gains of optimal differential capital taxation can be as high as 0.4% of lifetime consumption.     

A Note on Intertemporal Fiscal Competition and Redistribution

This paper studies fiscal competition among jurisdictions in a dynamic framework, where the degree of mobility of private capital across jurisdictions boundaries is perfect. The optimal tax on mobile capital is a source tax that taxes away factor rents. Further we show that taxation of mobile capital can redistribute income in favor of the immobile factor labor. This is because the factor rents generated by public inputs and appropriated by mobile capital exceed the efficient level of public expenditure for investments. JEL Code: H21, H23, H42, H71