The effect of income taxation on the labor supply of married men in Sweden

This paper presents labor supply functions estimated on a sample of prime age Swedish males. The model used takes account of the nonlinear character of individuals' budget sets caused by the progressive income tax. It also allows preferences to vary between individuals. Calculations with the estimated functions, using a partial equilibrium framework, indicate a sizeable effect of the income tax on hours of work. The average expected deadweight loss of the income tax is found to be approximately 20 percent of tax revenue.     

A decomposition of the Harberger expression for tax incidence

In this paper we propose a decomposition of the Harberger expression for the incidence of the corporate income tax into ‘commodity price distortion’ and ‘factor price distortion’ effects. By applying Harberger's estimates of the parameters for the U.S. economy, we will demonstrate that the factor price distortion effect, which has an extremely simple formal expression, explains 115 percent of the total effect of the tax change on the rate of return. This suggests that the commodity price distortion effect may be relatively unimportant in explaining the tax incidence. The difference between our two effects and Mieszkowski's (1967) output and factor substitution effects is also noted.     

SOME EMPIRICAL EVIDENCE ON DEMAND SYSTEM* AND OPTIMAL COMMODITY TAXATION

We have two major tasks in this paper. The first is to obtain a reasonable estimate of the Japanese demand system, which includes leisure, income and commodity choices. The second is to compute and evaluate the optimal tax equilibrium. The estimation result, based on the Almost Ideal Demand System, is found to be consistent with the microeconomic theory. We evaluate the optimal commodity tax structure by calculating the equilibria under lump‐sum, optimal commodity and uniform commodity taxation schemes. The deadweight losses under uniform taxation are very small, and the optimal commodity tax rates are strikingly close to uniform.     

Income tax progressivity and revenue growth

Musgrave and Musgrave's average rate progression is shown to be a measure of the progressivity of an income tax schedule from which useful propositions about the built-in flexibility and elasticity of total revenue can be obtained.     

RAMSEY TAXES MEET PRICE RIGIDITY

‘Ramsey taxes’ are commodity taxes that minimize deadweight loss. Evidence has shown dramatic differences in the extent of price rigidity across goods: while the prices of some goods change frequently, the prices of other goods seldom change. This paper examines Ramsey taxes in the presence of heterogeneous price rigidity. We find that, to minimize deadweight loss, lower (higher) tax rates should be imposed on goods with rigid prices if their relative prices are too high (low) relative to the would‐be situation of no price stickiness. Intuitively, Ramsey taxes remedy the relative price distortion caused by the price rigidity of some goods. We calibrate our model to data from Taiwan and the USA, showing a significant cut in welfare cost if Ramsey rather than uniform taxes are applied.     

Taxation and the stock market valuation of capital gains and dividends: Theory and emphirical results

Dividends seem to be more heavily taxed than capital gains. Why then do corporations pay dividends rather than repurchasing shares or retaining earnings? Either corporations are not acting in the interests of shareholders, or else shareholders desire dividends sufficiently for nontax reasons to offset the tax effect.In this paper, we measure the relative valuation of dividends and capital gains in the stock market, using a variant of the capital asset pricing model. We find that dividends are not valued differently systematically from capital gains. This finding is consistent with share price maximization by firms but inconsistent with the fact that most shareholderspay a heavier tax on dividends.We also show that the relative value of dividends provides an indirect measure of a marginal Tobin's q. The measured value of dividends relative to capital gains tends to be higher during prosperous periods, as is consistent with this interpretation. We hope that this time series on a marginal Tobin's q will prove to be useful in forecasting the rate of investment.     

An explicit solution to an optimal tax problem

Under specific but perhaps not over-restrictive assumptions on social welfare and consumer preferences, an explicit closed-form solution for an optimal linear income tax is derived. Specifically, given linear income supply functions and a rank-order social welfare function, the optimal tax rate and benefit level are characterized by four parameters: I, a measure of pre-tax inequality in the ability (wage) distribution; r, the fraction of potential total income required for (non-redistributed) government revenue; σ, the fraction of potential total income required for consumer subsistence expenditures; and a disincentive parameter, δ, the marginal propensity to spend on leisure or the amount by which earned income is reduced in response to a unit increase in unearned benefit. Defining , the ratio I/(1 - σ - r), the optimal tax rate τ is given by: The formula is used to fully characterize τ in terms of the parameters. Results include the following: τ = 0 if I = 0; τ = 1 if δ = 0; τ is increasing in I, σ and r; τ may be increasing or decreasing in δ depending on the value of ; when disincentive effects are large, τ becomes close to so that, in such economies, if σ and r are small, the optimal tax rate is equal to the measure of pre-tax inequality. Formulae for the deadweight loss associated with the tax are derived and some observations are offered on the empirical issues associated with the model.     

Cost-benefit analysis and project evaluation: A comparison of alternative approaches

A cost-benefit criterion is devised to identify small projects which increase production efficiency in a small open economy. This productive efficiency criterion requires only local information on the country's technology. Conditions which make this criterion consistent with more complex criteria based on consumers' preferences as well as technology are investigated in the second half of the paper. We find that the appropriate project evaluation criterion depends on what set of tax and transfer instruments the government can vary. Assuming that the government cannot vary tariffs but can vary all commodity taxes, we find that our initial productive efficiency project evaluation criterion is still valid. Assuming that the government cannot vary tariffs or commodity taxes but can vary direct transfers to consumers leads to a different project evaluation criterion, a generalized Harberger-Bruce-Harris criterion.     

Taxing a monopolist

We consider a simple, self-financing and informationally undemanding scheme to reduce the deadweight loss due to a monopolist's market power. Essentially, we propose taxing the monopolist and applying the tax revenue to generate a public demand for his output. It turns out that a favorable scenario for such a reform to generate an ‘efficiency increase’ (i.e. to increase total output) is an elasticity of market demand with an absolute value of less than 3 (a seemingly ‘realistic’ condition). We also consider the case for the implementation of the first best, and compare specific and ad-valorem taxes as a way to finance the public demand.     

Existence of Lindahl equilibria in measure theoretic economies without ordered preferences

A proof of the existence of Lindahl equilibria is given for a class of measure theoretic economies, possibly atomless, in which consumers' preferences need be neither complete nor transitive. This is done as an application of a nonstandard-analytic technique that allows for the derivation of statements concerning measure theoretic economies from analogous finite economy propositions. This approach to the problem allows use of Foley's method of working with an associated private goods economy without the dimension of the commodity space in the associated economy becoming problematic. Potential extensions of the technique used are also discussed.     

Tax subsidies,the rational demand for insurance and the health care crisis

An individual's optimal insurance coverage depends on balancing his gain through avoiding risk against his loss through the distortion of demand. The U.S. tax system subsidizes the purchase of excessive health insurance by excluding employer premium payments from employees' taxable incomes and by permitting the deduction of a portion of individual premiums. The current operational model of demand for health insurance shows that the tax subsidy does substantially increase insurance coverage. Since much of the rise in health care costs can be attributed to the growth of insurance, the tax subsidy is responsible for much of what is widely perceived as a health care crisis.     

Direct Versus Indirect Taxation: The Design of the Tax Structure Revisited

This article studies the optimal direct/indirect tax mix problem when individuals differ in several unobservable characteristics (productivity and endowments). It presents general expressions for the optimal commodity tax rates and proves that contrary to Atkinson and Stiglitz's (1976) result, differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods. When cross substitution effects are zero, the expressions resemble traditional many households Ramsey rules. In a Cobb–Douglas illustration, where endowments differ only in good 1 (interpreted as “wealth”), the tax on good 2 provides an indirect way to tax the unobservable wealth.     

Commodity taxes under uncertainty

This paper considers the relative distorting effect on output of commodity taxes, specific and ad valorem, in a situation where a firm faces revenue uncertainty. It is shown generally that this effect depends both on the precise nature of the firm's revenue uncertainty and on the degree of its risk aversion. More specifically, the distorting effect of each tax is characterised for a selection of objective functions and uncertain environments. These characterisations are compared in order to show the influence of alternative specifications on the relative distorting effect.     

Distortionary company car taxation: deadweight losses through increased car ownership

We analyse the effects of distortionary company car taxation through increased household car consumption for the Netherlands. We use several identification strategies and demonstrate that for about 20 % of households company car possession increases car ownership. The annual welfare loss of distortionary company taxation through increased car ownership is generally rather small, maximally €120 per company car, and much less than the welfare loss through increased expenditure on the company car. However, for policies that exempt households from paying tax on their company car, the annual deadweight loss is likely higher. Our first-best tax policy recommendation is to increase company car tax rates. However, our current results suggest that a second-best policy, which keeps average company car taxation constant but which reduces the marginal tax on cheaper cars and increases the marginal tax on expensive cars, would be welfare improving as overconsumption of company cars will be reduced.     

Externalities and optimal taxation

This paper reexamines the optimal tax design problem (income and commodities) in the presence of externalities. The nature of the second–best, and the choice of the tax instruments, are motivated by the informational structure in the economy. The main results are: (i) environmental levies (linear or nonlinear) differ in formula from Pigouvian taxes by the expressions for the optimal tax on private goods; (ii) externalities do not affect commodity tax formulas (linear and nonlinear) for private goods; (iii) externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear; and (iv) a general income tax plus strictly Pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution (at any given consumption bundle).     

The Cost of Public Funds in Australia*

A model of labour supply is used to calculate Australia's marginal cost of public funds, which is the appropriate cut-off benefit/ cost ratio for an additional public project. The labour supply model incorporates effective average and marginal tax rates faced by the representative household in each gross income decile. These rates are estimated from the ABS 1988–89 Household Expenditure Survey. A simulation analysis is performed to calculate the effect on labour supply of a 1 per cent increase in marginal tax rates. The estimated changes in tax revenues and deadweight loss in each decile are used to estimate the marginal cost of public funds.     

Impact of Economic Development on Commodity and Public Research Policies in Agriculture

A political-economic explanation is provided for the existence of commodity policy and research expenditures in agriculture. Structural economic characteristics such as pre-policy endowment incomes, deadweight costs, and distributional impact of research are found to determine the levels of commodity price subsidies (taxes in developing countries) and underinvestment in research in all countries. Unequal benefits from research generate two types of interaction effects: political interaction effects , whereby commodity policy reduces research-induced inequality, resulting in more research; and economic interaction effects , whereby deadweight costs per unit transfer decline with research. The latter effect generates increased levels of political optimal research investment.     

THE (HIDDEN) COST OF EMPLOYER PARKING POLICIES*

It has been argued that distortionary tax policies, which stipulate that employer parking is not taxed as a benefit in kind, as well as minimum parking requirements induce welfare losses. Using Dutch data, we show that current tax policies induce welfare losses of about 10% of employer parking resource costs. Hypothetical minimum parking requirements for employers, at levels currently applied in the United States, induce an additional deadweight loss of 18% of employer parking resource costs.     

Depreciation and interest deductions and the effect of the corporation income tax on investment

In this paper, we examine the effect of the corporation income tax on the investment decision of the firm particularly with respect to the role of interest and depreciation deductions in determining the neutrality of the tax. We demonstrate the need for introducing a constraint on corporate borrowing before a meaningful analysis of the firm's behaviour under certainty is possible. The effect of a given tax and deduction scheme on the firm's investment decision is found to depend on the form of this constraint. We then relate our results to that of earlier authors and indicate some problems with their analyses.     

Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare

Under a deadweight loss of tax and transfer, there is tension between the optimal policy choices of a Rawlsian social planner and a utilitarian social planner. However, when with a weight greater than a certain critical value the individuals’ utility functions incorporate distaste for low relative income, a utilitarian will select exactly the same income distribution as a Rawlsian.