Tax Competition,Investment Irreversibility and the Provision of Public Goods

This article studies the effects of tax competition on the provision of public goods under business risk and partial irreversibility of investment. As will be shown, the provision of public goods changes over time and also depends on the business cycle. In particular, under source‐based taxation, in the short term, public goods can be optimally provided during a downturn. The converse is true during a recovery: in this case, they are underprovided. In the long term, however, tax competition does not affect capital accumulation. This means that the provision of public goods is unaffected by taxation.     

The Welfare Effects of Environmental Taxation

Recent literature has investigated whether the welfare gains from environmental taxation are larger or smaller in a second-best setting than in a first-best setting. This question has mainly been addressed indirectly, by asking whether the second-best optimal environmental tax is higher or lower than the first-best Pigouvian rate. Even this indirect question has itself been approached indirectly, comparing the second-best optimal environmental tax to a proxy for its first-best value, marginal social damage (MSD). On closer examination, however, MSD becomes ambiguously defined and variable in a second-best setting making it an unreliable proxy for the Pigouvian rate. Given these observations, the current analysis reevaluates these welfare questions and finds that when compared directly to its first-best value, the second-best optimal environmental tax generally rises with increased revenue requirements. Even in cases where the second-best environmental tax is lower than its first-best value, the welfare gains may be greater than in a first-best setting. These results suggest that the marginal fiscal benefit (revenue recycling effect) exceeds the marginal fiscal cost (tax base effect) over a range of environmental tax rates that, for benchmark models, extends above the first-best Pigouvian rate. These findings reinforce the intuition that environmental policy complements rather than competes with the provision of other public goods.     

Which commodity taxes should supplement the income tax?

The analysis takes as its point of departure a continuum of consumers economy in which an optimum income tax exists and is the only tax instrument in operation. The welfare effects of introducing small excise taxes to supplement the income tax are then explored. Essential in this context are changes in the tax distortions of work incentives. It is shown that a commodity should be taxed or subsidized depending on whether it is positively or negatively related to leisure in a sense which is precisely defined. The results are related to earlier contributions to the literature on direct versus indirect taxation.     

Optimal Tax Policy under Environmental Quality Competition

This paper studies the socially optimal emission and commodity tax policy when consumers are willing to pay a price-premium for environmentally friendlier variants of a commodity vertically differentiated in environmental quality. The first-best levels of quality can be obtained by a combination of a uniform ad valorem tax and an emission tax (or a subsidy for buying green products). The first-best emission tax is higher than the social valuation of the positive externality associated with average environmental quality. Regardless of environmentally conscious consumers, if only one instrument is available, the second-best emission tax is equal to the social valuation of the positive externality associated with average environmental quality. A uniform ad valorem tax increases welfare only if the social valuation of the positive externality associated with average environmental quality is low enough.     

Poverty alleviation and tax policy

This paper examines public good provision and tax policy—optimal non-linear income taxation and linear commodity taxation—when the government departs from purely welfarist objective function and seeks to minimise poverty. This assumption reflects much policy discussion and may help understand some divergences of practical tax policy from lessons in optimal tax analysis. In contrast to Atkinson and Stiglitz (J. Public Econom. 6 (1976) 55), it may be optimal to use differentiated commodity tax rates, including the taxation of savings, even if preferences are separable in goods and leisure. The optimal effective marginal tax rate at the bottom of the distribution may be negative, suggesting that wage subsidy schemes can be optimal. Finally, optimal provision of a public good is analysed under poverty minimisation.     

Paternalism and Tax Competition

When consumers make mistakes, the government may wish to use paternalistic taxation as a corrective measure. We analyse the extent to which tax competition undermines the feasibility of paternalistic taxation. We show that the paternalistic component of a tax on a harmful good is reduced when there is cross-border shopping, but it does not disappear altogether. In a model with tax competition between two countries, only one of which has a paternalistic objective, we show that a minimum tax rate requirement can be Pareto improving despite the divergence in policy objectives. Tax harmonization, however, reduces welfare in the non-paternalistic country.     

Policy commitment and the welfare gains from capital market liberalization

This paper evaluates the quantitative impact of capital liberalization on the taxation structure and welfare of the liberalizing countries when governments conduct fiscal policy optimally but without commitment (time-consistent policies). The transition from a regime of capital autarky to a regime of free mobility leads to a decrease in the long-term tax rate on capital of 13 percent and an increase in the tax rate on labor of 2 percent. As a consequence of this taxation shift, welfare increases by about 1 percent. The reduction in capital taxation induced by capital market liberalization is welfare improving because, in the absence of capital mobility, the time-consistent policies over-tax capital.     

Subsidies versus Public Provision of Private Goods as Instruments for Redistribution

The literatures on differential commodity taxes and on quantity controls to supplement income taxation have developed separately. This paper combines these two strands in the standard framework of optimal non-linear income taxation. We use a model with two types of households where the government has access to both subsidy policy and public provision of a good substitutable for leisure, and ouseholds can supplement the publicity provided good from the market. We present conditions under which policy should involve one or both of these two instruments alongside income taxation. The model is extended to many ability types.     

Relative Wealth, Consumption Taxation, and Economic Growth

This paper examines the role of the relative wealth-induced status motive in affecting the neutrality of consumption taxation in an optimizing growth model. It is found that a key factor determining the validity of the neutrality of consumption taxation in both the level sense and the growth rate sense is the desire for relative wealth-induced social status. When individuals care about their relative wealth, a rise in consumption tax enhances the steady-state level of capital stock and consumption. Furthermore, if the production function takes a linear technology form as the engine of sustained growth, then increases in consumption taxation raise the economy's long-run growth rate. In addition, an optimal consumption tax policy provides full subsidies to consumption so as to induce the economy to achieve the social optimum and the optimal growth rate.     

Income tax policy and lifetime labor supply

A progressive income tax structure provides incentives for individuals to alter their rate of work and their age of retirement. Compared to a zero tax or proportional tax equilibrium, progressive taxation induces individuals to take less leisure in the form of retirement in exchange for more leisure during the worklife, especially at high wage levels. The imposition of a special pension tax provision on top of a progressive tax structure offsets the distortion on leisure alternatives imposed by progressivity. Indeed, the pension tax deferral provision can neutralize the impact of tax progressivity on the work profile over life. The magnitude of these tax inducements in the U.S. tax structure are non-trivial and therefore are expected to alter labor supply decisions over the lifetime. The model finds empirical support using data from the Social Security Newly Entitled Beneficiaries Survey.     

Uncertainty, Commitment, and Optimal Taxation

This paper examines the optimal tax design problem in the presence of wage uncertainty. The wage has a continuous distribution, individuals are ex ante identical, preferences are separable in labor supply and goods, public policy aims at providing the population with social insurance, and the only restriction on the tax instruments is that emanating from lack of public observability of realized wages and labor supplies. We show that optimal tax structures depend crucially on whether it is labor supply or goods that consumers have to commit to before the resolution of uncertainty. Specifically, we prove that, in the absence of commitment, the social insurance problem collapses to the traditional optimal tax problem. Second, if labor supply is precommitted, it would be possible to effect a first-best outcome. Third, commitment to goods would make indirect taxation a useful instrument of tax policy even in the presence of a general income tax; it requires differential tax treatment of committed and noncommitted goods. Finally, if preferences are separable between the two types of goods, precommitted goods must be taxed at a uniform rate lower than that on the noncommitted goods.     

Optimal environmental taxation and enforcement policy

We study the optimal environmental taxation and enforcement policy when (i) the regulator does not know the firms’ abatement costs, (ii) penalties for tax evasion are limited, and (iii) monitoring of pollution is costly. We show that the threat of being audited alter the usual firms’ incentives to over-estimate their abatement costs. In particular, depending on the firms’ abatement costs, the optimal policy may involve over or under-deterrence compared to the full information outcome. We then investigate the properties of a pollution standard. We show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered.     

The Taxation of Financial Capital under Asymmetric Information and the Tax‐competition Paradox

Information sharing between governments is examined in an optimal‐taxation framework. We introduce a taxonomy of alternative systems of international capital‐income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion found in earlier literature that integration of international caopital markets may lead to the under‐provision of publicly provided goods. However, in contrast to previous results in the literature, under‐provision occurs due to inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public‐good provision as well as complete and voluntary information exchange between national tax authorities.     

Disability insurance and environmental tax policy in a zero net emissions society

This study aims to show the importance of disability insurance from an environmental policy perspective. Within the framework of an overlapping generations model, we derive the emissions tax rate required to achieve zero net pollution. Our model implies that the emissions tax rate is always lower in the presence of disability insurance than it is in the absence of disability insurance. The results suggest that disability insurance can be used as an instrument for increasing gross domestic product performance when the government implements a zero net emissions policy.     

促进区域经济协调发展的税收对策

我国区域经济差距过大的税收政策存在税率相同而实际税负不一,税种设计、税收政策不合理,应利用税收政策刺激企业投资,实行差别税率,调整主要税种和完善税收优惠政策。     

Public capital, asymmetric information, and economic growth

Abstract.  We investigate the provision of public capital in an endogenous growth model with asymmetric information. In a credit market with costly screening, we show that the equilibrium contracts are characterized by the self‐selection of borrowers. Through identifying an additional adverse effect of taxation on growth, we show that the optimal tax rate in our model is smaller than the output elasticity of public capital. Therefore, our analysis justifies a more conservative tax policy in the presence of asymmetric information. Furthermore, our model suggests a number of implications that appear to be well supported by preliminary evidence in cross‐country data. JEL classification: D82, H21, O41     

Taxation of a Polluting Non-renewable Resource in the Heterogeneous World

This paper extends the literature on the taxation of polluting exhaustible resources by taking international heterogeneities and national tax-setting into account. We propose a two-country Romer model of endogenous growth in which the South is endowed with the stock of an essential polluting non-renewable resource and world economic growth is driven by a northern research sector. We consider the stock of pollution as affecting global welfare. First, we characterize the optimal environmental taxation policies. Second, we examine the impacts of national taxes. Their time profile determines the extraction path, the dynamics of pollution accumulation and that of world output. Their respective levels entail inter-country interactions by altering the efficiency of the world resource allocation, the tax revenues and the resource rents. We study isolatedly the distortional and distributional effects of local taxes. Then, we completely assess the overall impact of a unilateral tax increase. Finally, we find that, even if heterogeneous countries coordinate their taxation policies to correct the global environmental problem, their divergent strategic interests cause another global, non-environmental distortion in the allocation of the resource.     

Progressive taxation,tax exemption,and corporate liquidation policy

This paper develops a real options model of a firm that operates in continuous time with an infinite horizon. The firm receives stochastic profit flows that are subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold that makes the average tax rate increase with the tax base. The firm possesses an option to liquidate its operation, which is optimally exercised when the firm's profit flow reaches an endogenously determined threshold level (the liquidation trigger) from above. We show that the firm's liquidation trigger under progressive taxation increases with either a reduction in the tax exemption threshold or an increase in the corporate income tax rate. Corporate income taxes are thus not neutral when tax schedules are progressive.     

Optimal taxes on wealth and consumption in the presence of tax evasion

This article incorporates tax evasion into an optimum taxation framework with individuals differing in earning abilities and initial wealth. We find that despite the possibility of its evasion a tax on initial wealth should supplement the optimal nonlinear income tax, given a positive correlation between initial wealth and earning abilities. Further, even if income and initial wealth are taxed optimally, it is still desirable to levy a tax on commodities, though it can be evaded as well. Thus, our result provides a rationale for a comprehensive tax system. Optimal tax rates on commodities differ in general, however for the special case of a uniform evasion technology equal rates are optimal if preferences are homothetic and weakly separable.     

Excess Burden of Taxation and Environmental Policy Mix with a Consumer‐Friendly Firm

This study examines the environmental policy mix of tradable emission permits and emission taxes in a duopoly model with a consumer‐friendly firm. We analyse the interplay of the two policies and the welfare consequences in the presence of excess burden of taxation. We show that an emission tax can be redundant when both the excess burden of taxation and the degree of consumer friendliness are insignificant. However, when the excess burden of taxation is significant, tradable permits policy with tax treatment should be applied to enhance welfare in the presence of a consumer‐friendly firm. Finally, under the tax revenue‐neutral case where the excess burden of taxation does not matter, the environmental policy mix is also efficient if the degree of consumer friendliness is sufficiently high.