Money, Neutrality of Consumption Taxes, and Growth in Intertemporal Optimizing Models

This paper considers the effects of a proportional consumption tax with the same rate over time on the real growth path of a monetary economy. The analysis uses a variety of stylized monetary growth models in which the individual's consumption-saving decision is based on intertemporal utility maximization (e.g. the money-in-utility, transaction-costs, and cash-in-advance models). The neutrality of consumption taxation depends on the assumed role of money in the respective models, even though the tax revenue collected is fully rebated to consumers as lump-sum transfers. The consumption tax is generally superior to inflation tax (i.e. the rate of monetary growth) in terms of steady-state welfare, as long as the labour supply is fixed.
JEL Classification Numbers: E21, E41, E62, H24     

Fiscal policy in an endogenous-growth model with public investment: A note

This note extends the basic endogenous-growth model by Barro [Journal of Political Economy (1990) 98: S103–S125]. It is supposed that the government pays lump-sum transfers to the representative household or levies a lump-sum tax, besides financing public investment. Growth and welfare effects of fiscal policy are studied for the competitive economy and the growth rate of the social optimum is compared with the one of the competitive economy.     

The failure of Ricardian equivalence under progressive wealth taxation

Although the Ricardian Equivalence Theorem holds under a linear estate tax schedule, it fails to hold under a nonlinear estate tax schedule. In a representative consumer economy, a temporary lump-sum tax increase reduces contemporaneous consumption. If different consumers face different marginal estate tax rates because they leave bequests of different sizes, a lump-sum tax increase redistributes resources from consumers in low marginal estate tax brackets to consumers in high marginal estate tax brackets; aggregate consumption may rise, fall, or remain unchanged. These departures from Ricardian Equivalence hold more generally under any nonlinear tax on saving, wealth or income accruing to wealth.     

Taxation, Human Capital Accumulation and Economic Growth

Previous studies have shown that tax rates and the growth rate of output are negatively related under the assumption that government wastes tax revenues. This paper shows that, if tax revenues are used for human capital accumulation, tax rates and the growth rate can be positively related. An increase in the human capital tax rate will increase (decrease) the growth rate when the initial tax rate is small (large). An increase in the physical capital tax rate will increase the growth rate when savings are completely interest-inelastic. The effects of income taxes and lump-sum taxes on growth are also analysed.
JEL Classification Numbers: E6, H2, O4.     

Optimum taxation with errors in administration

The paper compares the welfare levels which can be achieved by two distinct tax regimes: lump-sum taxation, where one attempts to identify individuals and allocate transfers or subsidies on the basis of characteristics, and income taxation, where characteristics are not observed but personal incomes are measured and taxed. Where there are no errors in classifying individuals, lump-sum taxation is superior, but, where mistakes are made in the allocation of lump-sum grants or subsidies, income taxation may be more attractive. The level of errors where the regimes are equally desirable in terms of social welfare is computed in simple models following that of Feldstein (1973). Where there is strong aversion to inequality, then income taxation becomes preferable at quite small errors.In analysing income taxation it is shown that in the Feldstein model with endogenous wages the marginal tax rate (in optimum income taxation) on the more skilled is negative and that on the less skilled is positive in contrast to the standard results [see Seade (1977)] with exogenous wages.     

Fiscal policy,wealth divergence,and lifetime utility

Using a two-country dynamic optimization model where the less patient country decumulates and the more patient one accumulates wealth, we analyze spillover effects of lump-sum and consumption taxes. A lump-sum tax on a country definitely harms the other country through a change in the rate of interest. A lump-sum tax on either country always improves the less patient country's asset position. A consumption tax has no spillover effect, although it is Pareto-inferior. Applying these results into a closed-country context with heterogeneous agents, we also discuss policy implications of a discriminatory tax.     

The non‐monotonic relationship between seigniorage and inequality

Abstract. We present an analysis of how political factors may come into play in the equilibrium determination of inflation. We employ a standard overlapping generations model with heterogenous young‐age endowments, and a government that funds an exogenous spending via a combination of non‐distortionary income taxes and the inflation tax. Agents have access to two stores of value: fiat money and an inflation‐shielded, yet costly, asset. The model predicts that the relationship between elected reliance on the inflation tax (for revenue) and income inequality may be non‐monotonic. We find robust empirical backing for this hypothesis from a cross‐section of countries. JEL classification: E5, P16     

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.     

Does taxation have real effects on agricultural output? Theory and empirical evidence from China

China has a long history of taxing agriculture, with special levies on output. Whether farm households are taxed on a lump-sum basis or as a proportion of output is an important issue. This paper develops a theoretical model to understand better the effects of the lump-sum and proportional taxation on agricultural output. It then empirically investigates the predictions using tax and output data on Chinese agriculture. The theoretical model predicts that lump-sum taxation affects only consumption, while proportional taxation simultaneously affects consumption, capital inputs and final output. Although the main tax policy targeted output, our results suggest that taxation had only a modest impact on output since it was effectively applied as lump sum taxation brought about by localized levies and taxes.     

The Optimal Inflation Tax

We determine the second best rule for the inflation tax in monetary general equilibrium models where money is dominated in rate of return. The results in the literature are ambiguous and inconsistent across different monetary environments. We derive and compare the optimal inflation tax solutions across the different environments and find that Friedman's policy recommendation of a zero nominal interest rate is the right one.Journal of Economic LiteratureClassification Numbers: E31, E41, E58, E62.     

Fiscal incidence in an overlapping generations model with a fixed asset

We analyze a model of overlapping generations with a fixed factor (‘land’), malleable capital, and labor. We consider the dynamic effects of various fiscal policies including taxes on rent, wages, and creation of public debt on capital accumulation, land prices, and intergenerational welfare. Minimal assumptions (uniqueness and stability) imply that a land tax may initially raise land values, but the upper bound is less than one-half of the tax revenues. Assuming homothetic utility, the ratio between the long-run capital responses to a land tax and to a lump-sum transfer of equivalent revenue from the young to the old depends solely on the share of labor.     

BEN BERNANKE AND THE ZERO BOUND

From 2000 to 2003, when Ben Bernanke was a professor and then a Fed Governor, he wrote extensively about monetary policy at the zero bound on interest rates. He advocated aggressive stimulus policies, such as a money‐financed tax cut and an inflation target of 3%–4%. Yet, after U.S. interest rates hit zero in 2008, the Fed under Chairman Bernanke took more cautious actions. This paper asks when and why Bernanke changed his mind about zero‐bound policy. The answer, at one level, is that he was influenced by analysis from the Fed staff that was presented at the Federal Open Market Committee (FOMC) meeting of June 2003. This answer raises another question: why did the staff's views influence Bernanke so strongly? I seek answers to this question in the social psychology literature on group decision‐making. (JEL E52, E58)     

Labor supply,uncertainty, and efficient taxation

We analyze the structure of an optimal linear income tax when workers are uncertain about their wages at the time they choose their labor supplies. Background for the normative analysis is provided by an outline of the positive theory of wage taxation and labor supply under uncertainty. It is then shown that given imperfect information about wages, lump-sum taxation is not necessarily efficient. Because a wage tax reduces the riskiness of wage income, some combination of a lump-sum tax and a wage tax generally will minimize excess burden.     

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.     

中央对地方转移支付与地方征税努力-来自中国财政实践的证据

完善的转移支付制度应该尽可能地降低对地方征税努力的扭曲.本文通过构建转移支付征税努力模型,分析了不同性质转移支付对地方征税努力的影响,同时利用1997-2010年我国各省份财政实践的面板数据进行实证检验.研究结果显示,地方政府对中央转移支付的依赖显著地扭曲着地方征税努力.总量性质转移支付(即税收返还)、均等性质转移支付(即均衡性转移支付和定额补助)对地方征税努力存在着抑制作用,配套性质转移支付(除均衡性转移支付、定额补助外的一般性转移支付和专项转移支付)则能增进地方征税努力,但激励效果远小于总量性质转移支付和均等性质转移支付.     

Taxation,corporate financial policy,and the cost of capital: A comment

Theoretical models of the incidence of the corporate profits tax differ as to whether the tax distorts the allocation of resources, or is a lump-sum tax on the owners of capital. These differences derive from the assumptions made about the special provisions of the tax system with regard to the deduction of interest payments and investment expenditure. Two non-distortionary systems are identified which are shown to be equivalent to a capital levy when the tax is introduced and a zero tax on profits. Under the present UK system, however, a higher rate of corporation tax stimulates investment.     

Money Illusion and the Double Dividend in the Short Run

Abstract. In their seminal paper, Bovenberg and de Mooij (1994) elucidate why an ecological tax reform will not yield a double dividend, i.e. fails to increase the efficiency of the tax system. The present paper slightly modifies the Bovenberg and de Mooij model by introducing money illusion. With this modification, an environmental tax reform that raises the price level may generate a double dividend, since the additional tax on the dirty good does not reduce labor supply. A prerequisite for the double dividend to occur is a sufficiently small elasticity of substitution between clean and dirty consumption. Moreover, accounting for money illusion always reduces the intertemporal gross cost of the tax reform.     

The optimal taxation of risky capital income: An elasticity rule

Should risky capital income be taxed like safe income or should tax rates be differentiated? The question is analyzed in a 2-assets model of portfolio choice. Flat tax rates are chosen in order to maximize the investor's expected utility from terminal wealth subject to an expected tax revenue constraint. If lump-sum taxes are not available, optimal tax rates are characterized by an elasticity rule: The relative change in the risk remuneration should be equal to the inverse of the product of two elasticities. One is the output elasticity of capital. The other is the demand elasticity for risky investments with respect to a revenue preserving tax variation.     

Optimal linear income taxation with general equilibrium effects on wages

The paper argues that the endogeneity of wages may make a considerable difference to optimal linear tax rates. In this case there is not only the usual direct redistribution via the fiscal system but also the general equilibrium redistribution due to the change in wages. Depending on the elasticity of substitution of the production function and the labour supply elasticities these may be reinforcing or opposing. It is shown that the general equilibrium effect may plausibly outweigh the direct effect so that net redistribution to the lower paid involves a wage subsidy financed by a lump-sum tax.     

Stochastic Relation between Money and Capital in an Economy with Spatially Separated Markets

This paper examines the stochastic relationship between money and capital in an economy with spatially separated markets. The new ingredient of the model is that trades between markets may be desirable but are eliminated by market separation. When this cross-market friction is operative, aggregate capital is negatively correlated with and only with contemporaneous money growth, given past capital stocks. When the cross-market friction is not operative, aggregate capital can be positively correlated with contemporaneous money growth and current money growth has direct predictive power on future aggregate capital through its effect on the distribution of capital among agents. Therefore, in a more fragmented economy, aggregate capital is more likely to be negatively correlated with money growth and more unpredictable by past money growth.Journal of Economic LiteratureClassification Numbers: E40, E50