Social security, retirement age and optimal income taxation

It is often argued that implicit taxation on continued activity of elderly workers is responsible for the widely observed trend towards early retirement. In a world of laissez-faire or of first-best efficiency, there would be no such implicit taxation. The point of this paper is that, when first-best redistributive instruments are not available, because some variables are not observable, the optimal policy does imply a distortion of the retirement decision. Consequently, the inducement of early retirement may be part of the optimal tax-transfer policy. We consider a model in which individuals differ in their productivity and their capacity to work long and choose both their weekly labor supply and their age of retirement. We characterize the optimal non-linear tax-transfer that maximizes a utilitarian welfare function when weekly earnings and the length of active life are observable while individuals' productivity and health status are not observable.     

Markov-perfect optimal taxation

In this paper we study optimal taxation in a dynamic game played by a sequence of governments and the private sector. We focus on the Markov-perfect equilibrium of this game under two different assumptions on the extent of government's intra-period commitment, which in turn define two within-period timings of actions. Our results show that the extent of government's intra-period commitment has important quantitative implications for policies, welfare, and macroeconomic variables, and consequently that it must be explicitly stated as one of the givens of the economy, alongside preferences, markets and technology. We see this as an important result, since most of the previous literature on Markovian optimal taxation has assumed, either interchangeably or unnoticeably, different degrees of government's intra-period commitment.     

Externalities and optimal taxation

This paper reexamines the optimal tax design problem (income and commodities) in the presence of externalities. The nature of the second–best, and the choice of the tax instruments, are motivated by the informational structure in the economy. The main results are: (i) environmental levies (linear or nonlinear) differ in formula from Pigouvian taxes by the expressions for the optimal tax on private goods; (ii) externalities do not affect commodity tax formulas (linear and nonlinear) for private goods; (iii) externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear; and (iv) a general income tax plus strictly Pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution (at any given consumption bundle).     

Measurable welfare change with optimal commodity taxation

This paper extends the recent work of Julian Le Grand on the measurability of welfare changes in the presence of second-best taxation to the case of optimal commodity taxes and shows that the effects of public sector activities in the presence of such taxes may be accurately measured by use of observable market data.     

On optimal redistributive capital taxation

This paper addresses conflicting results regarding the optimal taxation of capital income. Judd proves that in a steady state, there should be no taxation of capital income. Lansing studies a logarithmic example of one of Judd's models and finds that the optimal steady‐state tax on capital income is not always zero—it is positive in some specifications and negative in some others. There appears to be a contradiction. However, I show that Lansing derives his result by relaxing the convergence hypotheses of Judd's theorem. With less restrictive hypotheses, a wider range of primitives (parameter values, initial condition, etc.) satisfy the hypotheses and because each specification of primitives generates its own optimal time path(s) for the model's variables, it follows that a wider range of time paths with a wider range of steady‐state properties is possible. This raises a question. What happens if the convergence hypotheses are weakened further so that they are satisfied by a wider yet range of primitives? I find that at any interior steady state for the model's optimal tax equilibrium, either the capital tax is zero or else the elasticity of marginal utility is unitary which is satisfied identically in Lansing's log example. In effect, Lansing's example illustrates the only way in which an interior steady state can violate the zero tax result.     

Efficiency,equality, income taxation and the brain drain: A second-best argument

This note conducts a second-best examination of the effect of the brain drain. If the size distribution of income is a welfare objective, lump-sum taxation is unavailable, and an Atkinson-type optimal income tax is used, it is shown that the opportunity to emigrate will create special difficulties for the LDC policy-maker.     

Moral hazard and optimal commodity taxation

This paper demonstrates that in an economy with moral hazard and more than one commodity, competitive equilibrium is not constrained-efficient. To correct the market failure, differential commodity taxation is necessary. A general optimal tax formula is derived, and special cases of is discussed.     

Financing education using optimal redistributive taxation

In this article, the joint use of an income tax and public provision of education as instruments to achieve the government’s distributional objectives is considered. Individuals differ in innate labour productivity and in aptitude to acquire skills through education. Actual labour productivity depends on both innate skill and the amount of education received. Using a generalized version of the Mirrlees tax problem that incorporates these features, qualitative properties of an optimal tax schedule are investigated.     

Union strategy and optimal direct taxation

Restrictions on working hours are more important in countries with a large welfare state. We show that this empirical observation is consistent with the strategic effects of such restrictions in a welfare state in the context of optimal direct taxation in the tradition of Mirrlees (1971) [Mirrlees, J.A., 1971. An exploration in the theory of optimum income taxation. Review of Economic Studies 38, 175–208]. Our results also apply to non-welfarist states that have income redistribution, but not in purely extortionary states.     

Public health insurance and optimal income taxation

If individuals differ not only in their inherent capacity to earn income, but also in the probability that they will fall ill, can subsidized public health insurance be justified on the grounds that it serves as an efficient tool to redistribute welfare? This question is analyzed in a model where the social welfare function is a weighted average of individual expected utilities, and where taxation is by a linear income tax. The answer is ‘yes’, except in certain special cases.     

Foreign competition and optimal privatization with excess burden of taxation

We examine in a mixed oligopoly setting how foreign competition and the excess burden of taxation will affect privatization policy in the presence of strategic tax/subsidy policies. We show that in the presence of excess burden of taxation with foreign competitors, output subsidy coupled with import tariff and partial privatization is adopted to improve the social welfare. However, if the excess burden of taxation is relatively large, the government may switch to use production tax coupled with tariff policy and partial privatization to improve the social welfare.     

On the optimality of optimal income taxation

The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (2009) [12] that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty?s critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.     

On the undesirability of commodity taxation even when income taxation is not optimal

An important result due to Atkinson and Stiglitz (1976) [Atkinson, A.B., Stiglitz, J.E., 1976. The design of tax structure: Direct versus indirect taxation. Journal of Public Economics 6, 55–75.] is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that this conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.     

On the optimal income taxation and educational decisions

In this paper we consider three different ways of incorporating individuals' educational choices into the design of optimal income tax policy. In one variant of the model (case 2), where an individual chooses his education before knowing his ability and after that education makes his labour supply decisions on the basis of known ability, it is shown that qualitative features of the optimal income tax schedule are not similar to those of the standard optimal income tax model. The marginal tax rate is generally not zero at the endpoints of distribution but is most likely negative. Using numerical methods, some interesting features quite different from earlier numerical results are revealed, especially in the second case. For example, the marginal tax rate is non-decreasing in income for a substantial income range. In addition, our calculations support neither the traditional views on the egalitarian nature of equal education nor its disadvantageous consequences in the perfect utilitarian society.     

On the optimal taxation of two person households

This paper generalises the optimal commodity tax formulae for households containing one person to cover the empirically relevant case of two person households. We provide an appropriate framework for the empirical estimation of the optimal tax structure and argue that this may be largely determined by female labour supply behaviour.     

Keeping up with the Joneses, consumer ethnocentrism, and optimal taxation

This paper sets up a two-good (domestically- and internationally-produced goods) model of a small open economy with consumption externalities and uses it to examine the optimal taxation. Since keeping up with the Joneses leads an individual consumption's to impose a negative externality on the consumption of others, a consumption tax and tariff are thereby socially desirable to correct this distortion. Due to the fact that the government has to account for additional distortion caused by consumer ethnocentrism and that keeping up with the Joneses in the consumption of domestic goods tends to reinforce the influence of ethnocentrism on the purchase of domestic products, the consumption of imported goods is subject to a higher tariff rate because of the cross-market externality. Of interest, if consumption only involves an own-market externality, there is no cyclical consequence for the optimal taxes. However, if consumption involves both own- and cross-market externalities, the optimal tariff is state-contingent and, more specifically, is countercyclical.     

The optimal taxation of unskilled labor with job search and social assistance

In order to explore the optimal taxation of low-skilled labor, we extend the standard model of optimal nonlinear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.     

The geometry of optimal taxation: a primal approach

We characterize zero tax results geometrically as a condition on indifference curves and the implementability constraint. The condition can also be expressed as a generalized homotheticity condition on the utility function and also extends older results on uniform taxation that use the duality approach. Many zero taxation results in dynamic macroeconomics can be derived from our characterization; thus it provides a unified framework for a systematic study of these phenomena. Our geometric method also allows to study the sign of deviations from zero tax results in more complicated frameworks such as taxation without commitment.