Efficient timing of income taxes

The marginal collection cost of an income tax is predicted to be a martingale, and the marginal income tax rate is predicted to be a supermartingale. Collection costs can be estimated from tax rates. Almost all tests based on a U.S. series of actual marginal income tax rates, 1913–1975, accept the hypothesis of random-walk behavior in collection costs, and reject the parallel hypothesis on tax rates.     

Efficiency aspects of increasing inheritance taxes while decreasing income taxes

This article tries to shed some light on the economic efficiency aspects of a tax reform that would increase inheritance taxes while decreasing income taxes. An analysis of labour market decisions following the activation of such a reform is presented. An international comparison of inheritance tax collection shows that almost all industrial countries impose an inheritance tax. However, government revenue from inheritance and gift taxes in Europe is lower than 1% of GDP and is very low in the United States as well. Applying the proposed reform could increase work hours and delay retirement decisions.     

An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada

Both federal and provincial governments in Canada levy corporate taxes on businesses in their jurisdictions, which potentially gives rise to horizontal and vertical tax externalities within the federation. Using a simple model of interdependent tax choices, we estimate tax-setting functions for the federal government, Ontario, Quebec, and an aggregate of the remaining eight provinces. We find evidence of significant vertical and horizontal tax interactions. Provincial tax rates respond negatively to the federal tax rate, while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces. JEL Classification: H25, H7
Une analyse empirique de l'interaction fiscale entre gouvernements: le cas des impôts sur les revenus d'affaires au Canada. Au Canada, les gouvernements fédéral et provinciaux collectent des impôts sur le revenu de sociétés sous leur jurisdiction. Voilà qui peut donner lieu à des effets externes horizontaux et verticaux à l'intérieur de la fédération. A l'aide d'un modèle de choix fiscaux interdépendants, les auteurs calibrent les fonctions d'imposition du gouvernement fédéral, des gouvernements du Québec et de l'Ontario, et d'une entité composée des huit autres provinces. On montre que les effets verticaux et horizontaux d'interaction fiscale sont significatifs. Les taux d'imposition des provinces réagissent négativement au taux d'imposition fédéral, mais certaines provinces accroissent leur taux d'imposition en réponse à des accroissements dans les taux d'imposition d'autres provinces.     

The general equilibrium incidence of environmental taxes

We study the distributional effects of a pollution tax in general equilibrium, with general forms of substitution where pollution might be a relative complement or substitute for labor or for capital in production. We find closed form solutions for pollution, output prices, and factor prices. Various special cases help clarify the impact of differential factor intensities, substitution effects, and output effects. Intuitively, the pollution tax might place disproportionate burdens on capital if the polluting sector is capital intensive, or if labor is a better substitute for pollution than is capital; however, conditions are found where these intuitive results do not hold. We show exact conditions for the wage to rise relative to the capital return. Plausible values are then assigned to all the parameters, and we find that variations over the possible range of factor intensities have less impact than variations over the possible range of elasticities.     

The incidence of heterogeneous residential property taxes

In an economy with multiple tax jurisdictions, the distribution of the burden of heterogeneous residential property taxes is shown to depend on the elasticity of demand for housing, the elasticity of substitution between land and capital in housing production, the elasticity of supply of land to individual tax jurisdictions, and the degree of population mobility between tax jurisdictions. It is demonstrated that the excise effects of the residential property tax may not cancel across jurisdictions and the average rate of tax may overstate or understate the burden on residential capital.     

The impact of changing skill levels on optimal nonlinear income taxes

The impact of changing an individual's skill level on the solution to a finite population version of the Mirrlees optimal nonlinear income tax problem with quasilinear-in-leisure preferences is investigated. It is shown that it is possible to sign the directions of change in everyone's optimal consumptions and optimal marginal tax rates in response to such a change.     

Optimal income tax under the threat of migration by top-income earners

We examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad, net of migration costs — utilities and costs both depending on productivity. A simple formula, that complements Saez's formula obtained in closed economy, is derived for the marginal tax rates faced by top-income earners. It depends on the labour elasticity, the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad. The Rawlsian marginal tax rates, obtained for the whole population, illustrate a curse of the middle-skilled. Simulations are provided for the French economy.     

The incidence of taxes: A dynamic macroeconomic analysis

This paper analyzes the incidence of various tax changes using the intertemporal optimizing framework developed by Brock and Turnovsky. The model contains a reasonably complete specification of the corporate sector, in which firms have the choice of financial structure. It also allows for a range of government financial policies, although only one is considered in detail. Both the short-run and the long-run effects of changes in the personal income, capital gains, and corporate profit tax rates are analyzed. It is shown that the effects of tax changes (a) vary between the short and long run; (b) the effects of tax changes depend critically upon the financial structure adopted by forms; and (c) may also depend upon government financial policy.     

The direct incidence of corporate income tax on wages

A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996–2003, we estimate the long run elasticity of the wage bill with respect to taxation to be ?0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. Only a weak evidence of a difference for multinational companies is found.     

Proportional income taxes and cores in a public goods economy

An equivalence relationship between cores and Pareto optimal allocations of a public goods economy where the public goods are to be provided through a proportional income tax is presented. For this purpose, the definition of the core is modified by allowing coalitions to tax their complements at any given rate. Also, a certain rule which specifies the rate is introduced.     

Differential incidence in the presence of initial distorting taxes

This paper extends the two-sector, two-factor, general-equilibrium analysis of differential tax incidence by considering an initial situation where the government finances a fixed commodity bundle by distorting commodity and factor taxes. This alters the traditional analysis of marginal differential incidence in a fundamental way by necessitating the simultaneous determination of the change in the rental-wage ratio, the change in aggregate welfare and the change in an endogenously adjusting tax parameter. This contributes towards an integration of the study of the excess-burden effects and the distributional effects of a given tax situation.     

A model of police financing through income and consumption taxes

This article studies police financing with a focus on the difference in the timing between federal and local government funds. In general, federal government funds came from income taxes collected before possible appropriative activities while local government funds came from consumption taxes collected afterwards. We find that income-tax financing results in more workers, more police, and fewer thieves when appropriation and tax rates are the same between the two cases. Funding the police before possible appropriative activities works as a deterrence. Our findings show the complexity of studying crime and police financing even in a highly stylized model.     

Family income and child outcomes in Canada

Abstract.  A positive relationship between income and child outcomes has been observed in data from numerous countries. A key question concerns the extent to which this association represents a causal relationship as opposed to unobserved heterogeneity. We use data from the National Longitudinal Survey of Children and Youth to implement a series of empirical strategies for estimating the existence and size of the effect of income on three measures of cognition. Our results indicate that the effect of income on these outcomes may well be positive, but that it is likely to be smaller than conventional estimates. JEL Classification: I10     

The Laffer curve in schedular multi-rate income taxes with non-genuine allowances: An application to Spain

This paper models the connection between tax revenue and marginal tax rates in modern personal income taxes. In so doing, new analytical expressions for the elasticity of tax revenue to tax rates are derived taking into account global and schedular income taxes in the presence of non-standard allowances. Based on these new analytical elasticities the implicit Laffer curve is characterised and explored in detail. Calculations are performed for the individual taxpayer and the aggregate population. When applied to microdata, the model permits us to locate individually the position of every taxpayer on the entire range of the Laffer curve as well as to characterise the “representative” aggregate Laffer curve. The utility of the model to forecast revenue is illustrated by applying it to Spanish personal income tax. The model confirms that the Laffer curve is essentially an intrinsic individual matter although a virtual aggregate Laffer curve for the whole population can be inferred.     

Income taxes and the income velocity of money: An empirical analysis

From 1981iv to 1983ii, the growth rate of the income velocity of money declined sharoly. Almost all forecasts of this rate based on standard models overpredicted the velocity growth rate over this period. In this paper it is argued that income taxes exert a direct and discernible influence on velocity of money which has not been recognized by these models. As a result, most models failed to capture the 1981–1983 Reagan tax cuts and, consequently, overpredicted the velocity growth rate in this period. It is shown that the tax-velocity hypothesis is supported by the results of an empirical test. It is also shown that the inclusion of taxes in a model of velocity helps alleviate the overprediction of the velocity growth rate in the 1981–1983 period.     

Lagged reactions in short-run estimates of tax shifting of company income and sales taxes in Kenya

The aim is to provide some insights into the short-run dynamics of tax shifting. Using Kenyan cross-section data on firms for 1974 and 1975, estimates are made of current and lagged shifting for both the company income and sales taxes. One of the findings is that the income tax is over-fully shifted. Because this outcome regularly occurs in the empirical literature of tax shifting, the main theoretical effort of the paper is devoted to explaining this result. A Williamson-type model is developed which attributes any excess of 100% shifting to reductions in managerial slack that accompany increases in the income tax.     

Carbon-reducing taxes and income inequality: general equilibrium evaluation of alternative energy taxation in Taiwan

Recently, several studies have been a detailed evaluation of the economic implications of energy taxation as a policy instrument to conserve energy and reduce carbon emissions. However, little attention has been devoted to inquiring about the economic implications of energy taxation in the newly industrialized countries (the so-called NICs). In this paper, we use a multisector, multihousehold computable general equilibrium model to assess the distributional effects of alternative energy taxation on the Taiwan economy. The counterfactual simulation technique is applied to investigate the income distribution implications of: (1) an increase in the import taxes of crude oil; and (2) an increase in the excise taxes of petroleum products. Our empirical results basing on Taiwan's data show that both energy taxes increase government revenue and the Gini coefficient, but reduce net value-added, private consumption, disposable income and equivalent variation. A raise in the Gini coefficient implies that there is a worsening in the distribution of income. The lowest income group suffers relatively large welfare and income loss, but the highest income group suffers a relatively small welfare and income loss. The distributional effects differ from household to household depending on the composition of their total consumption and the source of their factor income. Our findings reveal that the energy tax appears to be mildly regressive, there are broadly consistent with those cases of developed countries reported in previous studies.