Tax rate,government revenue and economic performance: A perspective of Laffer curve

The Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue. This paper explores the relationship between tax rate (direct tax on labor income), government revenue and economic performance in a perspective of the Laffer curve by applying Computable General Equilibrium (CGE) model. The results show that the top of China's Laffer curve is about 40%. The government should consider changes in the entire taxation system and not just changes in direct taxes while increasing direct tax rate. If China wants to maximize tax revenues, the direct tax rate should be 35%. We conduct a variety of sensitivity analyses and conclude that the government tax peak is always 5–10% earlier than the apex of the Laffer curve. So, if a country has reached the top of the Laffer curve, this paper strongly recommends that tax cuts will have positive implications for the economy and government revenue.     

International Capital Competition and Environmental Standards

This paper examines the welfare effects of capital taxation and environmental standards with and without a government spending constraint or international tax credits. This analysis delineates the intricate linkages of the two policy measures to both private income and government welfare. Loosening environmental control leads to more capital tax revenue for the government. The optimal capital tax rate may be of any sign, depending upon the ranking of the weights of government objectives and private utility. The same criterion also applies in determining how stringent the optimal environmental standards should be.     

Income tax reform for a globalized world: The case for a dual income tax

Countries that are industrialized, or becoming so, must adopt tax systems that are capable of raising considerable amounts of revenue efficiently, equitably and with administrative simplicity, while at the same time coping with the competitive features of a globalized world economy. A component of that tax system will be direct taxation of households alongside general sales and payroll taxation. This paper addresses the role that capital income taxes should play in the income tax system. Arguments for the preferential treatment of capital income are summarized, and a case is made for adopting a schedular approach in which capital and labor income are taxed according to separate rate structures. The particular case of the dual income tax system used in the Nordic countries is advocated whereby capital income is taxed at a low, flat rate and non-capital income is taxed progressively. It is argued that this system best combines the objectives of a good tax system in an internationally competitive environment.     

Tax Elasticities and the Impact of Discretionary Tax Measures on Government Revenue in Papua New Guinea, 1975–92

This paper evaluates tax elasticities and the impact of discretionary tax measures on government revenue in Papua New Guinea (PNG) using a dynamic macroeconometric model of taxation which captures the interaction between GDP, individual tax systems and individual tax revenues and bases. Our findings show that economic growth and discretionary tax changes have both been effective in mobilizing additional tax revenue. However, the responsiveness of the individual tax system reflected base-to-GDP elasticity except personal income tax whose elasticity reflected increased tax rates.     

Laffer curves in Japan

This paper investigates the Laffer curves in Japan, based on a neoclassical growth model. It is found that while the labor tax rate is smaller than that at the peak of the Laffer curve, the capital tax rate is either very close to, or larger than, that at the peak of the Laffer curve. This problem is more serious when the consumption tax rate is high. It is also found that to maximize total tax revenue, the government should increase the labor tax rate but decrease the capital tax rate.     

Is there any gain from social security privatization?

Increasing calls for a social security reform of switching from the pay-as-you-go (PAYG) system to a funded system has been seen in recent decades. This paper examines the effect of this reform on capital accumulation and the welfare of each generation. Three methods are used to finance the pension debt, government debt financing, tax financing, and government asset financing. With government debt or tax financing, the market equilibrium remains unchanged and all generations are as well off in the new system as in the PAYG system. Thus, switching from the PAYG system to a funded system is neutral. With government asset financing, the interest rate will decrease, private capital will increase, but the total output may either increase or decrease. The welfare effect is also ambiguous in general, depending on the rate of return of government assets. With plausible parameters, our simulation shows that the reform will lower the interest rate, increase private capital, and lower government capital in the short run, but raise government capital and increase output in the long run.     

构建我国地方税主体税种的探讨

地方税收是提供地方性公共产品的资金来源。由于缺乏主体税种,导致我国地方税收出现税源不稳定,增长难度大的局面。因此,有必要培育地方主体税种。从近期目标看,营业税与企业所得税是地方税主体税种;从远期目标看,财产税应建设成为我国地方税的主体税种。     

Corruption as an Occupational Choice: Endogenous Corruption and Tax Policy

Corruption is endemic in many countries, and empirical studies have demonstrated how it impacts on macroeconomic indicators. Theoretical studies have generally assumed an exogenously given proportion of the population are corrupt or that the public sector is fixed in size; far fewer explore how corruption emerges endogenously. We endogenize corruption as an occupational choice. Workers choose private or public employment; public employees can be honest or corrupt. Corruption is subject to a social sanction that results in a loss of self-esteem. Those who care little about the social sanction choose to be corrupt. When a firm meets a corrupt public employee it pays a bribe to secure a reduction in the tax rate. The economy has two self-sustaining equilibria with different levels of corruption. Corruption reduces tax revenue and the tax rate that maximizes revenue. An increase in the social sanction reduces corruption but also reduces tax revenues if the economy is in a high-corruption equilibrium. Paying a wage premium to public sector workers can result in all public sector workers being corrupt. Public sector audits to detect corrupt workers always reduce corruption but can only increase welfare when they are cheap to conduct and the economy is in a low-corruption equilibrium.     

Comparing the welfare effects of income and excise taxes in the presence of the other taxation paradox

This paper implements numerically a general equilibrium model in which all private producers are price makers and the government utilizes tax revenues to provide a public good. After deriving the partial equilibrium condition for an excise tax to increase price by more than the tax (for a monopoly firm), numerical examples are given, demonstrating this phenomenon for both partial and general equilibrium. In the general equilibrium context, optimal excise taxation and optimal flat-rate income taxation are compared. In the excise tax regime, prices increase by more than the taxes. In the income tax regime, prices actually decline relative to the no-tax regime. In all of the examples given, flat-rate income taxation is superior to excise taxation in terms of welfare. The author has benefitted from exceptionally helpful comments received from J. Ronnie Davis, John D. Wilson, Ralph W. Pfouts, and Amy Crews. He has also benefitted from conversations with Franz Gehrels, David E. Wildasin, Herbert J. Kiesling, and Harold York. The usual disclaimer applies.     

Taxation in the Tanzanian gold sector: Overview of impacts and possible solutions

This paper analyses the factors that reduce the gold sector's contribution to the Tanzanian government's revenue. Tanzania is among Africa's largest gold exporters. Yet ordinary Tanzanians have seen little benefit from this. This is partly because the government has enacted tax laws that are, as we shall see, overly favourable to multinational mining companies, and partly because of the same companies' business practices. Critics argue that the government fails to capture a substantial amount of state revenue as a result of low royalty rates, unpaid corporate taxes and tax evasion by major gold mine operators. This paper argues that the Tanzanian government should try to increase its share of revenues by taxation based on revenues, increasing its auditing skills and its involvement in mining, as well as by increasing the transparency of contracts and limiting the discretionary power of policy-makers in negotiating contracts.     

Indonesia's new tax reform: Potential and direction

This study aims to provide direction for policy and provide input to improve the quality of taxation services, by emphasizing and analyzing the existing tax potential and recommending a taxation reformation plan in accordance with fiscal sustainability and efforts to increase the level of Indonesian competence both for the transition period and in the long term. The result of the study has indicated that there is still the opportunity to increase national revenue without increasing rates and by increasing the capacity of tax administration and expanding the tax base, tax collection/revenue will increase. There are a number of indicators that illustrate this, such as the ratio of tax revenue to the GDP which is still relatively low compared to other countries, wide scope for increasing value added tax (VAT), PIT and CIT revenue productivity, etc. Our best estimation for potential tax revenue expansion for the next 2–3 years would be 2.1% of GDP where PIT and CIT contributed more than half of that expansion.     

Optimal Taxation in a Federal System of Governments

This paper demonstrates that the optimal structure of taxation in a federal system of governments is one in which only lower level governments are allowed to tax, and the higher level of government receives its revenues as contributions from the lower level governments. The central inefficiency created when multiple levels are allowed to tax is a revenue externality between governments that is analogous to a common pool problem. A federal system with multiple levels of taxing authority results in combined tax rates higher than would be optimal, a higher excess burden of taxation, and an inefficiency bias in government spending.     

Corporate tax systems and cross country profit shifting

The paper analyses optimal taxation of corporate profits whengovernments can choose both the rate and the base of the corporationtax, but are constrained to collect a given amount of corporatetax revenue. In a standard two-period model of investment andinternational mobility of portfolio capital only, the optimaltax system allows a full deduction for the costs of capital.When foreign direct investment is permitted, however, and firmscan shift profits between countries through transfer pricing,it will be optimal for each government to distort investmentdecisions in order to reduce tax rates and limit the incentivefor profit shifting.     

An Empirical Study on Taiwan's Tax Policy: 1966–1988

If government financing policy aims at reducing the distortionary cost of taxation over time as Barro's tax smoothing hypothesis suggested, then the government tends to run a "surplus" whenever the growth rate of its expenditure is expected to increase or the growth rate of aggregate income is expected to decline. We examine whether Taiwan's tax policy was consistent with this prediction of the hypothesis for the period between 1966 and 1988. Our formal tests and informal evaluations accord well with such prediction. One implication is that if Taiwan's "six year national development plan" results in a permanent increase in government spending, then the government will raise taxes to finance the increased spending.     

Taxing Times in Indonesia: The Challenge of Restoring Competitiveness and the Search for Fiscal Space

Indonesia’s economic growth picked up slightly in mid-2016 but remains below the level demanded by government and popular aspirations. Despite a plethora of reforms intended to increase efficiency and productivity, some policies are perverse and longstanding problems of implementation remain. The share of manufacturing has declined, the real exchange rate has appreciated, exports have dwindled, and growth has been trending downwards. The banking sector is stable but inefficient, with wide net interest margins and numerous barriers to competition. Trade protection, particularly in basic food commodities, has created high costs that weigh particularly heavily on the poor. Declining government revenues have placed increasing pressure on the public budget, even as the current administration aims to increase spending on infrastructure and welfare and to enhance productivity. In an effort to increase revenues, the government has announced a tax amnesty program and other measures. In addition, Sri Mulyani Indrawati, the new finance minister, has taken steps to cut non-essential expenditure in order to secure high spending on infrastructure and at the same time keep within the 3% budget deficit limit stipulated by law. Although the overall debt situation is not yet alarming, declining revenues and budget cuts that do not fully reflect this decline are putting pressure on increasing debt levels. The government’s high-profile tax amnesty program was the major policy initiative implemented in the second half of 2016 that aimed to relieve this pressure. Despite widespread criticism of, and scepticism about, the tax amnesty (both within and outside Indonesia), its first phase had a much higher participation rate than most independent accounts expected. Revenues raised so far through the amnesty are less than 60% of the official target, but this is actually a strong result for the short term. The bigger question, however, is whether the amnesty is a key element of a more encompassing strategy to overhaul the system of taxation and tax administration.     

Welfare cost of higher tax rates: An empirical laffer curve for The Netherlands

Summary On the basis of a simple general equilibrium model calculations are made of the welfare cost of higher tax rates. Furthermore, the Laffer curve for The Netherlands is estimated. Taking 1970 as the basic year and assuming that all tax revenues were paid back in lump-sum benefits, the Laffer curve topped at a marginal rate of 66.9076 and theMEB stood at 1.24. This means that an additional guilder in tax revenues involves a welfare loss of Dfl. 1.24 on top of the direct tax burden. Considering the true proportion of government income being spent on benefits, the Laffer curve is found at a marginal tax-rate of 70.1016. In that case theMEB amounts to 0.83 in 1970. The most striking finding was the sharp rise in theMEB, from 0.83 in 1970 to 6.36 in 1985. This high welfare cost is an indication that The Netherlands is nearing the limits of taxation on income. It is found that market signals are disturbed most when tax revenues are used for income transfers in a form which does not influence allocation decisions at the margin (lump-sum benefits). In that case relative prices are affected, whereas income effects are neutralized.The authors wish to thank Professor F. W. Rutten, J. van Sinderen and other colleagues at the Directorate for Macro-economic Policy of the Ministry of Economic Affairs for their stimulating support and critical remarks. J. Hulsman translated the original Dutch draft.     

International mobility of capital,wage indexation,and the cost of policy mistakes under ambiguity: a CGE evaluation

In this paper we focus on the role institutions and structural parameters play in macroeconomic policy design and test the differential effects of tax policies on two structural parameters: the degree of international capital mobility and the rules of wage indexation practiced in the economy. We evaluate counterfactual changes in taxation in the Argentine economy using a Computable General Equilibrium (CGE) Model with unemployment, calibrated with 2006 data, showing that policy mistakes (diagnosis failures) are costlier when the degree of capital mobility is greater and the rules to determine salaries could amplify the losses. Among other taxes, we evaluate the choice of export taxation, historically one of the preferred revenue sources of Argentine governments. We discuss the choice of taxes that an optimistic and a pessimistic policymaker will make under Knightian uncertainty and find that, in the case of our CGE, an optimistic policymaker prefers to tax export goods, while a more pessimistic one tends to tax imports or non-tradable goods.     

Can good events lead to bad outcomes? Endogenous banking crises and fiscal policy responses

In this paper, we study the impact of changes in the urban labor force and foreign direct investment on the banking sector, using a dynamic general equilibrium model with a financial sector. Numerical simulations are performed using stylized Chinese data, and bank failures are generated through increases in the growth rate of the labor force, a revaluation of the exchange rate, or an increase in debt issue to finance the government deficit, as compared to a benchmark scenario in which banks remain solvent. Thus bank failures can result from what might seem to be either beneficial economic trends or correct monetary and fiscal policies. We introduce fiscal policies that modify relative factor prices by lowering the capital tax rate and increasing the tax rate on labor. Such policies can prevent banking failures by raising the return to capital. It is shown that such fiscal policies are, in the short run, welfare reducing.     

Land tax and economic growth under credit market imperfection

We study the general equilibrium effects of land taxation on economic growth by extending the model developed by Kiyotaki and Moore (1997) to an endogenous growth model, where land is used not only as an input of production but also as collateral. Land taxation tends to hamper economic growth through the credit-contraction effect, but the overall direction on economic growth depends on the redistribution scheme of the tax revenue. Surprisingly, we show that if the tax revenue is fully refunded to entrepreneurs, the economy grows faster than a no-taxation economy. We calibrate our model and show that if taxation on land is raised by 1 percent, the land price initially falls by approximately 9.09 percent, while the economy grows faster by 0.6%.     

Subsidy policies in a fertility choice model

This paper compares the effects that a subsidy to health expenditure or a subsidy to child-rearing costs has in a fertility choice model in which mortality is also endogenously determined. Whichever subsidy is instituted, the population growth rate rises. While a subsidy to health expenditure reduces welfare, a subsidy to child-rearing costs might increase welfare. The welfare analysis also suggests that a subsidy to health expenditure should be financed by a capital income tax, while a subsidy to child-rearing costs should be financed by a consumption tax.