The geometry of optimal taxation: a primal approach

We characterize zero tax results geometrically as a condition on indifference curves and the implementability constraint. The condition can also be expressed as a generalized homotheticity condition on the utility function and also extends older results on uniform taxation that use the duality approach. Many zero taxation results in dynamic macroeconomics can be derived from our characterization; thus it provides a unified framework for a systematic study of these phenomena. Our geometric method also allows to study the sign of deviations from zero tax results in more complicated frameworks such as taxation without commitment.      

Optimal taxation, global externalities and labor mobility

This paper concerns transboundary environmental problems in the context of an optimal tax model. We assume that part of the labor force is mobile across countries, and that the set of tax instruments includes a nonlinear income tax and a commodity tax on the ‘dirty’ good that is causing damage to the environment. The purpose is to compare the (globally optimal) second best policy of a cooperative equilibrium with the policy implicit in a noncooperative equilibrium. We show that the commodity taxes differ between equilibria because of: (i) transboundary externalities not internalized by national governments, (ii) interaction effects between environmental and other policies, and (iii) labor mobility.     

Efficient taxation, wage bargaining and policy coordination

This paper is related to the literature on optimal nonlinear taxation under right-to-manage wage formation, and we assume that the fall-back profit facing firms during wage bargaining depends on the profit they can obtain if moving production abroad. The purpose is to study how policy coordination among countries can be used to increase the welfare level in comparison with an uncoordinated equilibrium. We consider coordinated policy reforms with respect to the marginal taxation of labor income, the unemployment benefit and the provision of a public good. The results show that policy coordination that leads to fewer hours of work per employee and/or a reduction of the unemployment benefit will increase welfare compared to the uncoordinated equilibrium.     

Two-sided altruism, Lindahl equilibrium, and Pareto optimality in overlapping generations models

Summary. This paper extends the Samuelsonian overlapping generations general equilibrium framework to encompass a variety of altruistic preferences by recasting it into a Lindahl equilibrium framework. The First and the Second Welfare theorems hold for Lindahl equilibrium with respect to the Malinvaud optimality criterion but not with respect to the Pareto optimality criterion. A complete characterization of Pareto optimal allocations is provided using the Lindahl equilibrium prices.Received: 2 October 2003, Revised: 13 September 2004, JEL Classification Numbers: D51, D62, D64, C62.An earlier draft of the paper was prepared for presentation at the Sixth World Congress of the Econometric Society, 1990, Barcelona, Spain. Much of this work was done when I was at Yale University and University of California-San Diego. I am grateful to an anonymous referee of this journal and to Don Brown, Vince Crawford and Joel Sobel for many insightful comments and encouragements on an earlier draft of the paper.     

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).     

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.     

Environmental policy and long-term welfare in a tourism economy

A dynamic general equilibrium model of a small open economy specialized in producing tourism services is presented. The tourism package is a bundle of attributes provided by firms, the government and the natural environment. Investment in accommodation increases the number of visitors but also congests public goods and reduces environmental quality. The model is used to determine the conditions for the existence of a long-term double dividend. These conditions depend on both the initial level of environmental quality and the responsiveness of the tourism price to marginal changes in environmental and accommodation quality and congestion of public goods. Support from the Balearic Islands Government (PRIB-2004-10142) and helpful comments from anonymous referees are gratefully thanked.     

Depreciation and intergenerational altruism in the private provision of public goods

The static model of the private provision of public goods is refuted by empirical and experimental evidence which shows that contributions are above the levels predicted by the theory. The model is reconsidered here in an intertemporal framework that allows the formation of a stock of public good over time and admits intergenerational altruism into preferences. Both of these factors affect the level of private provision. An intertemporal version of the Samuelson rule is derived and it is shown that, for some parameter values, the provision level determined by this is matched by private provision. For other parameter values, it is shown how a system of taxation can achieve the optimum.     

The politics of progressive income taxation with incentive effects

This paper studies majority voting over quadratic taxation and investigates under which conditions marginal progressivity emerges as a voting outcome. In our model with endogenous income, there is no majority (Condorcet) winning tax schedule. We then investigate less demanding political equilibrium concepts in order to see under which conditions the set of equilibria is composed only of progressive tax functions. We follow three strategies: (i) reduction of the policy space to the tax functions that are ideal for some voter; (ii) elimination of weakly dominated strategies and the use of mixed strategies in a standard Downsian two-party competition game; (iii) assumption that political parties interact repeatedly and care about the size of their majority. Although each approach captures a different aspect of political behavior, they point to the same (simulation-based) conclusion that progressivity is more likely to emerge for most distributions of abilities and that it is actually the only possible voting outcome if the distribution is sufficiently concentrated at the middle.     

General equilibrium effects of environmental policy: A CGE-modeling approach

Estimation of emission control cost functions is often carried out in a partial equilibrium framework, i.e., under the assumption that emission control measures have negligible effects on input and output prices. In this paper a computable general equilibrium model is used for simulation of the impact on factor prices and resource allocation of reductions of SO _infx ^sup- , NO _infx ^su- and CO₂-emissions. Thus the model includes markets for tradable emission permits, and the equilibrium prices of permits reflect the marginal costs of emission control. The results suggest that major emission reductions are likely to have general equilibrium effects, and thus that emission control cost functions that fail to take these effects into account may give a distorted picture of the economic impact of emission control.     

ACE versus CBIT: Which is Better for Investment and Welfare?

This article analyses the switch to an Allowance for CorporateEquity (ACE) or to a Comprehensive Business Income Tax (CBIT)type of tax system starting from the present German tax system.We show that in case an ACE type of reform is financed by anincrease in the VAT and not in the profit tax, it might be preferredto a CBIT even in the context of an open economy. Moreover,the required exogenous increase in the profit tax rate cannotensure revenue neutrality on its own due to the negative generalequilibrium effects it triggers on the whole economy. For aCBIT, the exogenous reduction in the tax rates on corporateand non-corporate profits leads to better results than whenwe allow for an endogenous change in the VAT. The best resultsarise when the CBIT is accompanied by a provision for immediatewrite-off and a lower profit tax or when the ACE with no additionalcapital gains taxation on household side is financed by an increasein the VAT. (JEL-Classification: C68, D58, D92, E62, H25.)     

The stationary wealth distribution under progressive taxation

This paper considers the long-run distribution of capital holdings in a model with complete asset markets and progressive taxation. Households are assumed to be heterogeneous in their labor market productivity. We show that this model is capable of producing a nondegenerate determinate wealth distribution. However, it also predicts that capital and labor income will be negatively correlated. These results are robust to the introduction of elastic labor supply and borrowing constraints.     

Giving gifts to groups: How altruism depends on the number of recipients

When a single gift goes to a group of recipients, how does giving depend on the size of the group? This question is important for understanding charitable giving and fund-raising, public goods provision, family altruism, and more. If we think of the gift as giving up a dollar to create a social surplus, then we want to know how the number of recipients of that surplus affects its value to the giver. In other words, how congestible is altruism? This paper builds a theoretical framework for this question and begins to answer it with a controlled experiment. The finding is that for most subjects altruism is congestible. For the average subject, a gift that results in one person receiving x is equivalent to one in which n people receive x / n^0.68 each.     

Rational expectations for large CGE models: A practical algorithm and a policy application

We describe a simple iterative method for solving large dynamic CGE models under rational expectations. Details are given for Australia's MONASH model but the approach applies to a wide range of CGE models. The method is automated in the RunMONASH Windows software, putting CGE modelling under rational expectations within the reach of non-specialist modellers. We provide an illustrative application in which MONASH results under rational expectations are compared with results under static expectations. The application and supporting software can be downloaded. Results from the application are interpreted in terms of elementary economic mechanisms.     

The welfare cost of imperfect competition and distortionary taxation

The welfare cost of imperfect competition in the product and labor markets in the United States is quantified in a dynamic general equilibrium model. We find that the welfare cost of imperfect competition in the product market is 3.62 percent while it is 0.58 percent in the labor market, taking the transition path from the distorted to the optimal steady state into account. If we also take into account that the US economy is characterized by distortionary taxation, the welfare cost of the product market distortion increases to 13.51 percent and the labor market distortion to 4.35 percent.     

Corporate taxation, incumbency advantage and entry

It is the purpose of this paper to show that corporation tax may affect industrial structure. Analyzing the effects of corporation tax, we demonstrate that it tends to favour incumbents over entrants. We further show that the effect of this advantage on an incumbent's output depends on his profit or loss history. An incumbent with a past profit is likely to produce a greater output, thereby partially or fully crowding out an entrant's output. In contrast, an incumbent with a past loss is more likely to produce a smaller output, making entry easier.     

A note on corporate taxation,limited liability,and asymmetric information

Becker and Fuest (this issue, p. 1–10) provides a new explanation for the link between limited liability and corporate taxation. The authors argue that a corporate tax on all entrepreneurs with limited liability is optimal when entrepreneurs can offset potential losses and when asymmetric information exists regarding projects’ qualities. This note considers a model with a slightly modified production technology. It confirms that entrepreneurs’ abilities to offset losses and the existence of asymmetric information may affect government policy. However, it also shows that the optimal taxation policy differs from that suggested by Becker and Fuest.