Capital Structure under Costly Enforcement*

We consider financial structure and repayment behavior in a setting where cash flows are private information to the entrepreneur and the cost of enforcing repayment differs across security holders. If enforcement costs are lower for shareholders than for creditors, a mixed capital structure with debt and equity can obtain in equilibrium. Under a mixed capital structure, creditors intervene in low cash‐flow states while shareholders intervene in high cash‐flow states. Moreover, strategic defaults, costly bankruptcy, shareholder intervention, and violation of absolute priority occur with positive probability on the equilibrium path. Several of the predictions from our framework are consistent with evidence not readily explainable by existing theories.     

Taxation and Wage Bargaining*

The paper analyzes the effects of personal taxes on wage bargaining It concludes that an increase in tax progressivity will normally increase union wage-bargaining pressure and so raise the equilibrium wage This is the opposite result to that recently derived by Creedy and McDonald (1990).     

Rationalizing Australian Taxation Revisited*

This paper reviews the author's (1971) tax rationalization proposal to examine whether a tax simplification scheme eliminating minor transaction taxes and reducing heavy reliance on personal income tax by introducing a general consumption tax continues to have merit for Australian tax reform. The first part of the paper points to increases in avoidance and evasion as a major change perceivable in Australian taxation between the 1960s and the 1980s and indicates other important changes that have occurred. Section II presents an equity and simplicity case for general indirect consumption taxation supplemented by personal income and wealth taxes. Section III discusses the inter-governmental financial relations implications of the proposed rationalization. The paper concludes that in the light of events in 1983 such rationalization proposals suitably modified continue to have merit.     

Redistributive Taxation under Ethical Behaviour*

We consider the implications of ethical behaviour on the effect of a redistributive tax‐transfer system. In choosing their labour supplies, individuals take into account whether their tax liabilities correspond to what they view as ethically acceptable. If tax liabilities are viewed as ethically acceptable, a taxpayer behaves ethically, does not distort her behaviour, and chooses to work as if she were not taxed. On the other hand, if ethical behaviour results in tax liabilities that exceed those that are ethically acceptable, she behaves egoistically (partially or fully), distorts her behaviour, and chooses her labour supply taking into account the income tax. We establish taxpayers' equilibrium behaviour and obtain that labour supply is less elastic when taxpayers may behave ethically than when they act egoistically. We characterise and compare the egoistic voting equilibrium linear tax schedules under potentially ethical and egoistic behaviour. We also compare our results to those obtained under altruism, an alternative benchmark.     

Taxation of profits when there are profits

Profits taxes fall on both pure profits and the use of capital as an input. Simulations of a Cournot oligopoly suggest that gains from the former are not outweighed by losses from the latter.     

Prices or Quantities Can Dominate Banking and Borrowing*

The possibility of intertemporal banking and borrowing of tradable permits is often viewed as tilting the various policy debates about optimal pollution control instruments towards favoring such time-flexible quantities. This paper shows that this view can be misleading, at least for the simplest dynamic extension of the original “prices versus quantities” information structure. The model of this paper allows firms to know and act upon the realization of uncertain future costs two full periods ahead of the regulators. For any given circumstance, the paper shows that either a fixed price or a fixed quantity is superior in expected welfare to time-flexible banking and borrowing. Furthermore, the standard original formula for the comparative advantage of prices over quantities contains sufficient information to completely characterize the regulatory role of intertemporal banking and borrowing. The logic and implications of these results are analyzed and discussed.     

Fertility,Taxation and Family Policy*

Historically, there is clear evidence of an inverse relationship between female labour supply and fertility. However, the relationship across countries is now positive. Countries like Germany and Italy, with the lowest fertility, also have the lowest female participation rates. This paper analyses the extent to which this can be explained by public policy, in particular taxation and the system of child support. The results suggest that countries which have individual rather than joint taxation, and which support families through child care facilities rather than child payments, are likely to have both higher female labour supply and higher fertility.     

Taxation and market power when products are durable

Empirical studies suggest that industries hardest hit by government regulations, such as pollution regulations, are both highly concentrated and manufacture durable products. We analyze a two-period durable goods monopoly model where the firm faces government restrictions in the form of pollution or excise taxes. In contrast to non-durable monopolistic industries, we show that taxes on pollution or an excise tax on output may increase a durable goods monopolist's commitment ability and market power. Indeed, any policy which restricts future output may have the perverse effect of increasing a monopolist's bargaining power with buyers and enhance their profits.The authors would like to thank several anonymous referees and the editor for helpful comments and suggestions on earlier drafts of the paper. Of course, any remaining errors are the sole responsibility of the authors.     

Optimal Taxation of Risky Human Capital*

In a two‐period life‐cycle model with ex ante homogeneous households, earnings risk, and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work. Education subsidies are not used for social insurance, but they are only targeted at offsetting the distortions of the labor tax and internalizing a fiscal externality. Both optimal education subsidies and tax rates increase if labor and education are more complementary, because education subsidies indirectly lower labor tax distortions by stimulating labor supply. Optimal education subsidies (taxes) also correct non‐tax distortions arising from missing insurance markets. Education subsidies internalize a positive (negative) fiscal externality if there is underinvestment (overinvestment) in education because of risk. Education policy unambiguously allows for more social insurance if education is a risky activity. However, if education hedges against labor‐market risk, optimal tax rates could be lower than in the case without education subsidies.     

The Mathews Report on Business Taxation*

The controversial Mathews proposals on inflation and business taxation have been, in part, adopted by the Fraser Government. These proposals are based on the concept of (physical) capacity maintenance which the Report concludes is essential for business survival. It is shown that this conclusion is incorrect and arises only because an irrational pricing policy is assumed. Moreover, the recommendations measure, up rather poorly against conventional criteria such as equity and efficiency. Reform of both company and personal taxation is proposed so as to ensure that only real-income and real-interest receipts are taxed. These new proposals are robust when confronted with the usual criteria.     

Labor Taxation and Foreign Direct Investment*

In this paper, we analyze the implications of the effective taxation of labor for profits and, hence, the decisions made by multinational enterprises concerning the location of their headquarters. If a higher employee‐borne tax burden reduces manager effort, it should also negatively affect firm profits and the location of the headquarters. We compile data on personal income tax profiles for 52 economies and the year 2002 at different moments of the distribution of gross wages. Our findings suggest that higher employee‐borne labor taxes are less conducive to the location of headquarters and foreign direct investment stocks in a given host economy.     

Improving Mineral Taxation Policy in Australia*

Australian State governments have begun to increase royalty rates and other mineral taxes. The most instructive approach to taxation policy for the minerals sector is to set up a general model of mines which year the optimal structure of taxes. A model of mine production under uncertainty is presented. The optimal tax is a single tax with two parts. a bonus bid and conditional tax payments based on the ex-post rent of the mine. The actual structure of taxes levied by State and Commonwealth governments is seen to be distinctly sub-optimal in several respects. Proposals to move the actual to word the optimal structure are made, recognizing some of the constraints on information and the maximum acceptable rate of tax reform .     

Optimal Taxation of International Income Flows*

Double taxation of international income flows has been regarded as undesirable and international tax agreements have been negotiated to avoid it. The questions asked are whether double taxation is appropriate and whether cooperation is required to reach the optimal solution. The results are that generally some double taxation is desirable, as long as taxes are applied at the appropriate rates, and that an efficient solution can be attained in the absence of explicit cooperation using a deduction rule, instead of the now commonly used credit rule. A rationale for the current system of tax agreements and their emphasis of the credit rule is discussed.     

Reconsidering the Marginal Welfare Cost of Taxation*

A model with sticky wage rates and involuntary unemployment is used to compute the marginal cost of taxation, and these estimates are compared with those obtained from the conventional price-clearing equilibrium model. Important determinants of the marginal cost estimates are the response of sticky wages to a tax increase, the elasticity of demand for labour, and the unemployment gap. By contrast, the conventional model focuses on the elasticity of labour supply. The different models have different implications for efficient tax design. However, the new model generally agrees with the conventional model regarding significant efficiency costs of higher taxation.     

Age‐related Optimal Income Taxation*

In most countries, average income varies with age. In this paper we investigate if and how it is possible to enhance the redistributive mechanism by relating tax payments to age. Using an OLG model where some individuals are low skilled all their life while others are low skilled when young but high skilled when old, we first show how an age dependent optimal income tax can Pareto improve upon an age independent income tax. We then characterize the optimal age dependent income tax. A tax on interest income is part of the optimal tax structure.     

Optimal Redistributive Income Taxation and Efficiency Wages*

In this paper, we integrate efficiency wage setting with the theory of optimal redistributive income taxation. In doing so, we use a model with two skill types, where efficiency wage setting characterizes the labor market faced by the low‐skilled, whereas the high‐skilled face a conventional, competitive labor market. We show that the marginal income tax implemented for the high‐skilled is negative under plausible assumptions. The marginal income tax facing the low‐skilled can be either positive or negative, in general. An increase in unemployment benefits contributes to a relaxation of the binding self‐selection constraint, which makes this instrument particularly useful from the perspective of redistribution.     

Optimal Social Insurance with Linear Income Taxation*

We study optimal social insurance aimed at insuring disability risk in the presence of linear income taxation. Optimal disability insurance benefits rise with previous earnings. Optimal insurance is incomplete even though disability risks are exogenous and verifiable so that moral hazard in disability insurance is absent. Imperfect insurance is optimal because it encourages workers to insure themselves against disability by working and saving more, thereby alleviating the distortionary impact of the redistributive income tax on labor supply and savings.