Capital income taxation,tax criteria,and intergenerational welfare

In a two-period overlapping-generations model, residence criteria are shown to be optimal with lump-sum transfers to the younger generation in a dynamically efficient open economy even if all wage income, corresponding to rent income under exogenous labor supply, is not taxed away. When tax revenues are also distributed to the older generation — which indeed may be desirable for short-term intergenerational welfare distribution reasons — a weighted average rule is derived for optimal international taxation. The taxation of domestic savings income follows the inverse elasticity rule in respect to savings and, surprisingly, higher investment elasticity increases the tax level. Finally, for a small open economy and for large identical economies, tax competition with a mixed scheme of residence-based taxes and source-based subsidies yields the same tax policy as tax cooperation with no restrictions on the domestic and international capital income tax instruments.     

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.     

The Optimal Environmental Tax and Urban Unemployment in an Open Economy

This paper investigates how a rise in the urban pollution tax rate may affect urban unemployment and welfare in a small open Harris–Todaro (HT) model with intersectoral capital mobility. First, by formulating urban pollution as a dirty input in manufacturing, we find that an increase in the urban pollution tax rate can increase the level of urban unemployment even with intersectoral capital mobility. That is, the optimistic finding by Rapanos (2007 ) that environmental protection policy reduces urban unemployment in the long run does not always hold. Second, the (sub)optimal pollution tax rate under urban unemployment is higher than the Pigouvian tax rate (the marginal damage of pollution). This result opposes those of Beladi and Chao (2006 ) for a closed HT economy and that of Tsakiris et al. (2008 ) for an open HT economy with sector‐specific capital.     

Welfare impacts of equal-yield tax reforms in the UK economy

A multisectoral dynamic general equilibrium tax model with and without announcement effects for open and closed capital markets is used to evaluate efficiency gains and transitional effects from equal-yield tax reforms for seven different taxes in the UK economy. Impacts of an unanticipated tax reform on investment, capital accumulation, output and employment are compared to those of anticipated tax reforms. Households, producers, traders, investors and the government are found to be more capable of adjusting their economic behaviour when tax announcements are made in advance. In equal-yield tax experiments welfare gains up to 1.4% of base year GDP can occur by removing distortions in taxes. Welfare loss of up to 2.05% of it can happen if a less distortionary tax, such as the labour income tax is replaced by more distortionary taxes. These simulation results hold whether the capital markets are closed or open.     

Environmental levies and distortionary taxation:: Pigou, taxation and pollution

I note an important distinction between the optimal price of environmental quality in a second-best world and the optimal level of environmental quality. Using an analytical general equilibrium model, I show that for reasonable parameter values, an increase in tax distortions (arising from an increase in required tax revenues) leads to a fall in the optimal Pigouvian tax rate even while environmental quality improves. In general, knowledge of the direction of changes in optimal environmental tax rates due to changes in the economy is not sufficient for understanding the impact on environmental quality.     

Optimal Export Taxes, Welfare, Industry Concentration, and Firm Size: A General Equilibrium Analysis

By using an imperfect-competition model, it is shown that an export tax, optimal in partial equilibrium, is upwardly biased and may not be optimal in a general equilibrium setting with free entry/exit. It is shown also that the export tax has an ambiguous impact on firm size. The results of an applied general equilibrium model for the Turkish economy suggest that the export tax estimated with the PE formula is larger by a small factor than the computed export tax. However, the export tax leads to an increase in firm size and, most importantly, to a social welfare loss.     

Optimal policy for environmental goods trade in asymmetric oligopolistic eco-industries

In this paper, we examine the optimal structure of an environmental tax to pollution, a production subsidy to a domestic eco-industry, and an import tariff on environmental goods (EGs) in a two-country model where the home country imports EGs from the foreign country. Home and foreign firms that produce EGs engage in Cournot competition. We then assume that the number of the home local firms which produce EGs is constant, but that of the foreign firms is variable. Our main findings are as follows: (I) The optimal environmental tax level may be lower than the Pigouvian level even if the tax has a positive impact on the output of EGs produced by a domestic firm. (II) The optimal tariff level may be positive when the country implements the first best policy combination in a closed economy regarding the environmental tax and the subsidy. (III) The optimal subsidy level may be positive, and then the subsidy may be substitutive for the import tariff on EGs.     

Equilibrium capital taxation in open economies under commitment

This paper analyzes equilibrium capital taxation in open economies with strategic interaction in a neo-classical growth model. Under perfect commitment, I show that non-cooperative capital taxes are zero in the long run for a large open economy, thereby generalizing the result previously established only for the special cases of a closed and a small open economy. This does not represent a race to the bottom, though, since the result is independent of the degree of capital mobility, the number of countries, or a country׳s size relative to the rest of the world. Moreover, when countries cooperate, they still set capital taxes to zero in the long run. These outcomes are robust to different equilibrium specifications, the inclusion of endogenous government spending, and heterogeneous agents and non-linear labor income taxation. Governments find it optimal to implement the efficient capital allocation in the long run, both in a closed and an open economy; this trumps incentives to tax foreigners’ domestic capital holdings by raising capital taxes and attracting capital from abroad by lowering capital taxes.     

Dynamic scoring of tax reforms in a small open economy model

We examine dynamic revenue effects of a permanent tax cut on labor and capital income using a small open two-sector dynamic general equilibrium model. We use a dynamic scoring technique to calculate long-run as well as transitional effects on fiscal revenue when a tax cut is financed by either a lump-sum tax or consumption tax. We show that the revenue loss from an income tax cut becomes substantially smaller when agents can use international financial markets compared to the case of the closed economy. Responses of tradable and nontradable sectors to the capital income tax cut display a stark contrast in both long-run equilibrium and transitional dynamics due to different factor intensities. Capital income tax cut in the tradable sector is the most efficient policy instrument in terms of minimizing fiscal revenue loss. These simulation results suggest that fiscal sustainability issue when implementing a tax cut could be overstated.     

Optimal exporting of exhaustible resources with endogenous trade revenue: The case of a resource-scarce and capital-short economy

This paper discusses a dynamic trade problem of a resource-scarce and capital-short open economy. In this economy, exhaustible resources are traded for foreign capital. Different from previous research on similar topics, the models in this paper allows for endogenous export revenue. The optimal trade behavior of the economy is discussed here. The efficiency conditions for the optimal trading under various assumptions are derived. These conditions correspond to the noted Hotelling rules in a closed economy. Finally, policy implications of the results are presented.     

Pollution, Capital Mobility and Tax Policies with Unemployment

In this paper we highlight aspects related to the links among unemployment, international capital mobility, and tax policies in a small open developing economy. Without international capital mobility, the joint optimal trade and environmental policies require a zero tariff and an emission tax lower than the Pigouvian tax. With international capital mobility and a capital tax (subsidy), the optimal emission tax rate is smaller (larger) compared to the rate when capital is untaxed. When both the emission tax and the capital tax/subsidy are jointly chosen optimally, then the optimal policy on capital is a lower subsidy, or even a tax, compared to the standard capital subsidy of the no pollution case.     

Fiscal Policy,Economic Integration and Unemployment

In this paper fiscal policy is examined for an open economy characterized by unemployment due to efficiency wages. We allow for capital and firm mobility in a model where the government chooses the level of wage, source-based capital and profit taxation. The taxing choices of governments are analyzed in scenarios which differ with respect to the constraints imposed on the set of available taxes and on the mobility of firms. As a general result, the welfare loss from labor market imperfections increases when tax bases become internationally mobile, which suggests an increasing relevance of domestic labor-market reforms when tax bases become global.     

Wage endogeneity,tax evasion,and optimal nonlinear income taxation

This paper studies the interaction between tax evasion and wage endogeneity within a Mirrleesian optimal tax framework. It characterizes the optimal marginal income tax rates on the skilled and the unskilled workers and the optimal amount of resources to be spent on deterring tax evasion. It shows that tax evasion weakens the incentives for the government to manipulate the marginal tax rates for the purpose of exploiting general equilibrium effects on wages. Moreover, the extent of this depends on the curvature of the evasion cost function. It also argues that marginal income tax rates are likely to be higher when the government attempts to deter evasion.     

Altruism,jealousy and the theory of optimal non-linear taxation

This paper studies optimal non-linear taxes in a world in which there is altruism and jealousy. A formula for optimal marginal tax rates is derived which turns out to be a simple and intuitively appealing extension of a result due to Mirrlees. The paper shows that in this sort of economy all of optimal tax theory's general results either no longer hold or need not hold, and it sets out appropriate modifications to standard tax rules.     

Environment,imperfect competition,and trade: Insights for optimal policy in general equilibrium

I build a two-country general oligopolistic equilibrium model, in which sectors differ in emissions and technologies, and pollution can be transboundary. I derive the optimal bilateral environmental policy for the economy as a whole, for the cases in which the environmental damage either linearly or quadratically increases in total pollution. The analysis highlights that the optimal emission tax can even be negative, and bilateral trade liberalization should be matched with either a rise or a fall in the optimal emission tax. The moments of the emission distribution and technology distribution across sectors are fundamental to implement optimal environmental policies.     

Optimal income tax under the threat of migration by top-income earners

We examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad, net of migration costs — utilities and costs both depending on productivity. A simple formula, that complements Saez's formula obtained in closed economy, is derived for the marginal tax rates faced by top-income earners. It depends on the labour elasticity, the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad. The Rawlsian marginal tax rates, obtained for the whole population, illustrate a curse of the middle-skilled. Simulations are provided for the French economy.     

Consequences of Environmental Tax Reform for Unemployment and Welfare

We investigate the welfare effects of environmental tax reform, i.e. raising environmental taxes and using the proceeds to reduce distortionary taxes on labour. The framework of analysis is a small open economy with involuntary unemployment due to a rigid consumer wage. Environmental tax reform boosts not only environmental quality but also employment if substitution between labour and resources is easy, the production share of the fixed factor is large, and the initial tax rates on resources and profits are small. If the initial tax system is sub-optimal with a negligible tax on resources, profits rise as well.     

Optimal linear income taxation in the presence of emigration

This paper examines optimal linear income taxation when individuals are able to escape taxation by migrating. A model is presented in which closing the economy to migration must raise the optimal marginal tax. However, this result may be reversed under an alternative definition of a closed economy.     

General Equilibrium Impacts of Monetary and Fiscal Policies on Welfare of Households in South Asia

Impacts of fiscal and monetary policies are assessed in an open economy two sector multi‐household general equilibrium tax model with money for South Asia. Despite impressive growth rates there is evidence for alarming gaps in the distribution of income among households that require very careful design of economic policies. Generally the impacts of fiscal expansions are positive for all categories of households under the flexible price system but the gains are much higher for households in the upper income group than for those in the bottom. In theory the equilibrium relative prices guarantee the optimal allocation of resources in such economy. Simulation results show that demand, output and employment are sensitive to the preferences of consumers, confidence of producers and sector specific production technologies. Monetary policy is super‐neutral under flexible price regime but can complement fiscal policy well when aggregate prices are made sticky. Combination of monetary and fiscal policies in this manner can have extensive impacts in efficiency and redistribution. Higher taxes distort incentives to work and investment from richer households slowing down the economy. This reduces the welfare level of both rich and poor. Flexibility in prices enhances the market mechanism and makes the fiscal policy more effective and efficient.     

Foreign-Investment Tax and Tariff Policies in Developing Countries

In this paper we examine the welfare effects of tax on foreign capital and tariff policies for a small open economy with sectoral unemployment. The individually and jointly optimal tax and tariff rates in the absence or presence of international tax credits are derived. A subsidy on foreign capital coupled with a tariff can be jointly optimal when tax credits are absent in the source country. However, the capital subsidy policy may fail to hold when the foreign country follows a tax credit system.