Family Altruism and Incentives

This paper characterizes the pattern of intergenerational transfers that emerges in an altruistic model of the family when children's effort is explicitly made endogenous and parents have imperfect information on the stochastic income realizations of their children. It is shown that, if parents can credibly commit to a pattern of transfers, they will choose not to compensate children in bad outcomes as much as predicted by the standard (no uncertainty, no asymmetric information) dynastic model of the family. In this context, Ricardian equivalence holds whenever non‐negativity constraints are not binding.     

UNCERTAIN INCOME,UNCERTAIN TAXES AND RICARDIAN EQUIVALENCE*

L. K. C. Chan (1983) and R. B. Barsky et al. (1986) have demonstrated that a tax cut financed by bonds to be repaid from proportional income taxes on uncertain future income, by reducing the latter's riskiness, stimulates current consumption - Ricardian equivalence does not hold. However, their two-period models exclude the possibility that future taxes are uncertain. In this paper a three-period model is developed that, by allowing the government two periods in which to collect taxes, introduces ex ante tax rate uncertainty. This renders the result concerning Ricardian equivalence ambiguous. By comparison, taxes levied as lump sums and via a ‘lottery’ respectively produce the ‘usual’ effects (zero and negative) on consumption.     

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.     

Ricardian equivalence and fiscal distortions in the Dominican Republic

This paper tests the Ricardian equivalence hypothesis in the context of the Dominican Republic (DR). The results rejected the Ricardian theorem but a weaker version is shown to have significant implications for the DR. If the government borrows to increase spending, private consumption is crowded out and the economy will suffer in the long run. The outcome is worst if the government borrows to deliver a tax cut. In particular, for every RD$ 1.00 of additional debt incurred to finance government primary spending, private consumption and gross domestic product (GDP) fall by a meaningful RD$ 2.15 and RD$ 1.15 respectively. If the debt is used to finance the tax cut, the fall is RD$ 2.15 in both consumption and output. Interestingly, if the government uses taxes to cover a budget deficit, the effect is neutral and consistent with Ricardian equivalence. The paper argues that fiscal distortions are in part responsible for these multipliers. Distortions are estimated to be 21 % coming from different sources including taxes evasion and fiscal drainage. These findings suggest that the DR could benefit from either reducing the level of fiscal distortions or the size and scope of the Dominican government. If, however, the government continues to pursue an active fiscal role under the current environment, it will generate an unnecessary burden to consumption and economic growth.     

Ricardian Consumers With Non-Keynesian (And Possibly Ricardian) Propensities

Barsky, Mankiw and Zeldes (1986) have argued that uncertainty about future income can generate strong ‘Keynesian’ responses to tax changes by consumers who have far‐sighted ‘Ricardian’ preferences. The paper argues that this conclusion relies on an inappropriate treatment of future tax policies. Using a more appropriate framework generates behaviour which may instead be approximately Ricardian, and which, if it deviates from the Ricardian benchmark, usually does so in an anti‐Keynesian direction. If Keynesian behaviour is observed, therefore, it requires a different explanation.     

Yet another long-run neutrality result: Absence of tax-induced growth effects under implicit intergenerational contracts

We provide an example whereby the existence of optimal time-consistent implicit contracts between the young parent and the yet-to-be-born child could nullify the long-run effects of income taxes on human-capital investment and growth. Implications for the Ricardian equivalence theorem are also discussed.     

Taxation and Tournaments

This paper analyzes the effects of progressive taxes on labor supply and income distribution in the context of the rank‐order tournament model originally developed by Lazear and Rosen (1981). We show conditions under which a more progressive tax schedule will cause so large general equilibrium effects that the inequality in disposable income will actually increase. We also show that a non‐zero redistributive tax is always optimal if society's welfare function displays inequality aversion; this result always holds, regardless of behavioral responses and general equilibrium effects.     

Bequests as signals: Implications for fiscal policy

This paper explores how bequests affect redistributive fiscal policies. The main premise underlying our approach is that bequests act as a signal of parental affection. It is shown that private transfers in the form of bequests may not offset public transfers to a significant extent, even though such private transfers are altruistically motivated and are strictly positive for all but a negligible set of households. This is notable since these conditions are normally believed to yield a fully offsetting response (Ricardian equivalence). We explicitly identify circumstances under which the departure from Ricardian equivalence is large. Notably, the departure may be quite large even when our model is observationally very close to one in which Ricardian equivalence is known to hold (in the sense that children care very little about parental affection).     

Are income and consumption taxes ever really equivalent? Evidence from a real-effort experiment with real goods

The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects' work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.     

A simulation study of income tax evasion

In a game-simulation context, tax evasion behavior of 15 subjects was observed. Large fines were found to be more effective deterrents than frequent audits. The decision to underreport income appears to be influenced by different factors than the magnitude of underreporting. Tax evasion behavior differed widely among individuals.     

Does dividend tax impede competition for corporate charters?

We develop a model of jurisdictional competition for corporate charters among the states in which a firm’s agency cost depends on the federal dividend income tax rate and the takeover regulations of its domicile state. When firms are mobile across states, the federal dividend income tax rate affects both the intensity of competition among the states and the equilibrium level of state takeover regulations. Our model shows that increasing dividend tax rate weakens the competition for corporate charters under a condition: dividend-paying and the market for corporate control are complementary corporate governance mechanisms. This condition holds empirically, suggesting that dividend tax not only discourages firms from paying dividends but also weakens their corporate governance by disincentivizing states to improve their corporate laws.     

Input versus output incentive schemes

Previous analyses have modeled income tax evasion as a ‘portfolio problem’, deriving the optimal consumption of the ‘risky asset’ (unreported income) assuming a fixed probability of detection. We compare an alternative audit policy to the standard random audit policy. We focus on an ‘audit cutoff’ policy, in which an agent triggers an audit if reported income is ‘too low’, and is not audited if reported income is ‘sufficiently high’. We find that random audit rules are weakly dominated by audit cutoff rules. Given lump-sum taxes and fines, audit cutoff rules are the least-cost policies which induce truthful reporting of income.     

李嘉图等价定理及其在中国的适用性分析

李嘉图等价定理认为,政府的财政收入形式的选择,不会引起人们经济行为的调整。但是,现代经济学家们并非完全同意李嘉图的见解,无论是对其必要条件的检验还是对其结论的检验都存在着争论。而通过实证分析我国1989—2004年的政府发债分别与消费和投资的关系,可以得出结论：从历史数据来看,李嘉图等价定理在我国并不适用。     

Tax progressivity, income distribution and tax non-compliance

This article examines the determinants of tax non-compliance when we recognise the existence of an imperfectly competitive “tax advice” industry supplying schemes which help taxpayers reduce their tax liability. We apply a traditional industrial organisation framework to model the behaviour of this industry. This tells us that an important factor determining the equilibrium price and hence, the level of non-compliance, is the convexity of the demand schedule. We show that in this context, this convexity is affected by the distribution of pre-tax income, the progressivity of the tax-schedule and the way in which monitoring and penalties vary with income. It is shown that lower pre-tax income inequality as well as a less progressive tax code may cause more tax minimisation activities. Therefore, the frequently advocated policy of reducing the highest tax rate may fail as a policy directed at improving tax discipline. One way of offsetting the possible harm to tax compliance from a less progressive tax could be an adjustment of the penalty and monitoring functions.     

On the user cost and homeownership

This paper studies the differences in the cost of housing services for renters and homeowners and calculates the bias that results when we value owner-occupied housing services using a rental equivalence approach. Our framework is a life-cycle model with endogenous tenure choice with households facing idiosyncratic uninsurable earnings risk and housing price risk. We model houses as illiquid assets that provide collateral for loans. To analyze the impact of preferential housing taxation on the tenure choice and the bias, we consider a tax system that mimics that of the US economy. Namely, owner-occupied housing services are not taxed and mortgage interest payments are deductible. Through simulations, we show that a rental equivalence approach (relative to a user cost approach) overestimates the cost of housing services. The magnitude of the bias is very sensitive to both the income tax rate and the size of adjustment costs in the housing market.     

Cheating,emotions, and rationality: an experiment on tax evasion

The economics-of-crime approach usually ignores the emotional cost and benefit of cheating. In this paper, we investigate the relationships between emotions, deception, and rational decision-making by means of an experiment on tax evasion. Emotions are measured by skin conductance responses and self-reports. We show that the intensity of anticipated and anticipatory emotions before reporting income positively correlates with both the decision to cheat and the proportion of evaded income. The experienced emotional arousal after an audit increases with the monetary sanctions and the arousal is even stronger when the evader’s picture is publicly displayed. We also find that the risk of a public exposure of deception deters evasion whereas the amount of fines encourages evasion. These results suggest that an audit policy that strengthens the emotional dimension of cheating favors compliance.     

Optimal income taxation and migration: a world welfare point of view

This paper considers a world in which a distortionary income tax must be employed to raise and redistribute revenue. The optimal taxation of emigrants relative to those left behind is examined under the objective of world social welfare maximization. When tastes for consumption and labor do not depend directly on residence, the optimal tax system induces individuals to reside where the marginal products of their chosen labor supplies are highest. This paper also proves the existence of an optimal tax system under which each individual resides where he pays the greatest tax. This result holds even when tastes are allowed to vary with residence in an interesting way.     

Tax evasion and tax morale: A social network analysis

We study the effects of tax morale and social norms on tax evasion when individuals interact in a network. We present a model that incorporates incentives for tax compliance in the form of punishment and fines, tax morale, and reputation for social behaviour. We assume that individuals adjust their tax morale by observing the neighbours' tax morale. We simulate the model for different values of the parameters and show that the steady-state share of taxpayers as opposed to tax-evaders is affected by the probability of finding like-minded peers in the reference group (network integration), the weight that individuals attribute to reputation, and the share of individuals who update their tax morale. Last, we consider the possibility of a fiscal authority using the knowledge of the network structure and targeting ‘central’ individuals. We show that by positively affecting the tax morale of individuals whose influence within the network is high, a fiscal authority can increase tax compliance.     

Deviant generations, Ricardian equivalence, and growth cycles

Two equilibrium possibilities are known to obtain in a standard overlapping-generations model with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. Dynamic equilibria, where the bequest motive is occasionally operative, cannot emerge. This paper studies bequest-giving behavior and out-of-steady-state bequest and growth dynamics in a Ak model with intra- and inter-generational consumption externalities. These externalities, by their very presence, do not destroy Ricardian equivalence. They may, however, give rise to deviant generations—generations that do not leave a bequest having received an inheritance, and vice versa—and that seals the fate for Ricardian equivalence. Consumption externalities may also generate interesting indeterminacies and endogenous growth cycles that did not exist otherwise.     

Individual welfare,majority voting,and the properties of a linear income tax

A fundamental problem in public finance is the determination of parameters of income tax functions. This paper focuses on this problem in the context of a linear tax function whose parameters are chosen according to majority vote by the taxpayers. The possibility of conflict between high national income and distributional equity is explored and it is found that, even when the distribution of earning power is rightward skew, majority voting does not necessarily lead to the adoption of a tax function which has the average tax rate rising with income.