Welfare improving distributionally neutral tax reforms

In a new model with incomplete markets, I quantitatively determine tax reforms that are welfare improving, distributionally neutral, and leave the budget balance unchanged in the long run. I consider a new reform. I eliminate capital income taxation and replace it with progressive consumption taxation, consisting of taxing necessities and luxuries at different rates. I compare steady states under various tax regimes. I find that progressive rather than uniform consumption taxation generates higher welfare gains in the long run and during the transition to the steady state. While this type of reform achieves redistribution neutrality only in the long run, it generates welfare gains for the whole population during the transition.     

Welfare criteria for tax reforms: Efficiency aspects

This paper provides unexpected support to Nash's view of how bargaining determines the social choice. We first present a spatial model of electoral competition with probabilistic voting and a very close relation between voters' preferences and their choice probabilities. The outcome of the electoral competition game is then shown to be precisely the social alternative that maximizes a Nash-type social welfare function (theorem 1). This electoral outcome is also interpreted as a unanimity likelihood maximum (corollary 1). Within our framework, existence and uniqueness of such an outcome are guaranteed (corollaries 2 and 3).     

Welfare criteria for tax reforms : An extension

Pazner and Sadka (1981) offer simple sufficient conditions for accepting or rejecting tax reforms based on the theory of index numbers. We provide not only sufficient conditions but also necessary conditions for the validity of tax reforms. Thus, a complete characterization of tax reforms is obtained.     

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.     

Carbon tax simulations using a household demand model

The main objective of this paper is to analyse consumer response and welfare effects due to changes in energy or environmental policy. To achieve this objective we formulate and estimate an econometric model for non-durable consumer demand in Sweden that utilises micro- and macro-data. In the simulations, we consider two revenue neutral scenarios that both imply a doubling of the CO₂ tax; one that returns the revenues in the form of a lower VAT and one that subsidise public transport. One conclusion from the simulations is that the CO₂ tax has regional distribution effects, in the sense that household living in sparsely populated areas carry a larger share of the tax burden.     

Green tax reforms and habits

Using a dynamic general equilibrium model, we explore the role of habit formation when analyzing green tax reforms under the double dividend hypothesis. We assume increases in energy taxes and adjust capital taxation in a revenue-neutral framework to evaluate the effects on welfare. Since the existence of an environmental dividend is uncontroversial, we mainly focus on the efficiency dividend. Our findings show that, when taxes on household energy consumption increase, habits and transitional dynamics alter household decisions, and change the efficiency dividend. However, when the tax increase is on energy used as an input, reform always induces a welfare cost in terms of efficiency. In this case, habits play a less important role.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

Approximating the efficiency gain of tax reforms

Proper analysis of tax reform requires evaluation of the welfare effects induced by a change from one tax system to another. We present two methods for estimating these changes using only local information pertaining to an initial equilibrium with distortive taxes. It is shown that these methods provide very accurate approximations to the true gains even when large tax changes are involved. Concentrating on a model with capital and labor income taxes, we show that other approximations whose reference point is a nondistortive equilibrium are considerably less precise. Some concluding remarks are made on the potential of these methods for optimization purposes.     

Welfare effects of commodity tax harmonisation

The European Commission is currently seeking a rapid accelaration of the process of commodity tax harmonisation within the European Community. Substantial changes in domestic tax structures are envisaged, yet the welfare-theoretic basis of the policy has remained obscure. This note goes some way towards suggesting a welfare argument for harmonisation as a collective response to tax-induced trade distortions (intentional or otherwise). It is shown that a programme of multilateral domestic tax reform involving convergence towards an appropriately weighted average of pre-existing tax structures - a kind of ‘harmonisation’ - is potentially Pareto improving.     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

Welfare effects of tax and price changes

This paper studies a model of equilibrium in an economy without distributional problems but with distortions. The case where the distortions are due to specific taxes is examined in particular detail. A formula is derived to compare the utility levels in neighbouring equilibria corresponding to slightly different distortion levels. Several well known results in welfare economics and public finance are derived as corollaries, and other applications are suggested. An interpretation using consumers' and producers' surplus is given.     

Assessing tax reforms through the elasticity of reported income: an empirical analysis for Spain

This paper demonstrates the usefulness of the elasticity of reported income to assess tax reforms from the perspectives of tax revenue and well-being. Employing different identification strategies, evidence is provided of the value of the elasticity of gross reported income in Spain and, based on this elasticity, a detailed assessment is made of the impact of the increase in marginal tax rates which the Spanish government approved in 2012. We use microdata from the Taxpayers Panel of the Institute for Fiscal Studies. The mean value of this elasticity for Spain is 0,363 with considerable heterogeneity depending on taxpayers’ characteristics.     

Should high-tax countries pursue revenue-neutral ecological tax reforms?

A politically intriguing question concerning the effects of a revenue-neutral ecological tax reform is whether such a political measure may succeed in providing a double dividend: to improve environmental quality and increase employment simultaneously. Theoretical studies reveal that for a competitive labor-market a green tax reform hardly yields a positive employment effect, whereas for a non-competitive market such an effect may well be obtained. However, little attention has focused on whether the ecological dividend remains attainable when an employment dividend accrues. We show for three different non-competitive labor-market scenarios that a positive employment effect can be expected, but that, for high-tax countries, environmental quality plausibly deteriorates when a revenue-neutral ecological tax reform is implemented.     

The 2008 tax rebate and US household debt

Starting in May 2008, the US government disbursed over $100 billion to households in the form of tax rebates. Embedded in the Economic Stimulus Act of 2008, the rollout was aimed at limiting, or possibly reversing, the negative effects of the recession that was just starting. Substantial research concentrated on capturing the impact of the stimulus on consumption behaviour. Prior research suggests that the tax rebate had a small and/or no positive effect. This raises the question: How did individuals spent their tax rebate? Using data from the Survey of Income and Program Participation 2008 panel wave 1 topical module, the data suggest that more than half of the respondents, who received the rebate, used this one-time windfall to pay off debt. Our findings indicate that this effect is more pronounced among low-income individuals, who chose to service their debt burden instead of increasing immediate consumption. The findings point to a stabilizing effect of the tax rebate programme on the financial sector, suggesting that substantial distributional asymmetries exist concerning tax rebate programmes in an economy where a large share of households are indebted.     

The impact of tax reforms on unemployment in a SMOPEC

This paper analyzes revenue-neutral tax reforms for a small open economy which is constrained to a balanced current account and whose producers have market power on the world market. We consider origin-based and destination-based commodity taxes as well as taxes on income, the payroll, and on an imported factor of production. Our main findings are the following. First, the strength, and for some parameter constellations, even the sign of the employment effect of tax reforms varies with the degree of openness of the economy. Second, the indeterminacy of the sign of the employment effect crucially hinges on the presence of an internationally mobile factor. The central mechanism underlying our results are adjustments of the real exchange rate which have repercussions on wage and price setting and therefore on employment.     

A household model of charitable contributions and tax incentives

The aim of this paper is to present a theoretical model of the monetary contributions made by households to nonprofit organizations, and to analyse the effect of tax incentives according to the different tax systems currently in force in the European Union Member States. This model is estimated by means of data drawn from the Family Expenditure Survey and the Regional Accounts in Spain covering the period 1990–91. We analyse the effects that different variables and tax incentives have on household decisions. The results indicate that the decisions to donate, and how much to be donated, are taken sequentially and are significantly influenced by household characteristics, the provision of public funds and donation price. The analysis of the Spanish tax system indicates that the model generates donation incentives.     

Demand for household sanitation in India using NFHS-3 data

India has the highest number of people defecating in the open, and the Indian Government is trying to eradicate by constructing toilets for its citizens. This paper is about whether the government is likely to succeed in its cleanliness drive mission by a supply-side policy. We examine the household preference and other the factors leading to open defecation in India. We examine preference for having a toilet in the household over the preference of other household durable goods. Our results suggest toilets get a lower preference—ranked 12, out of 21 different types of consumer durables we investigate. The results also indicate a strong case for imparting education and public awareness, especially, among the female cohort. We find the odds of having toilets in a household with an educated woman (18 years of schooling) is 3.1 times more than a household with illiterate or preschool educated women. Among other factors households living in urban areas are 19 times more likely to have toilets in comparison with their rural counterparts.     

Evidence of a stock market wealth effect using household level data

Using the household level data of urban households in Korea, this paper presents evidence for a statistically significant stock market wealth effect for the highest income bracket households who typically hold a large share of corporate stock.     

Welfare effects of changing commodity tax rates toward uniformity

This paper presents a theory of tax reform that is applicable to a many-good economy where (i) the initial tax structure is arbitrarily given, (ii) no lump-sum tax exists, and (iii) the initial tax revenue must be maintained after the reform. Sufficient conditions are established under which tax changes definitely result in increases in welfare. They indicate that in a wide class of situations the uniform tax structure can be a useful intermediate target on the way to optimum.