Time-consistent taxation in a dynastic family model with human and physical capital and a balanced government budget

Abstract .  This paper analyzes optimal, time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget. When tax revenue is used for publicly provided consumption or lump-sum transfers, leisure would be higher than its social optimum. Pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax. Also, it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax, and hence it is not a practical guide to policy. Further, a consumption tax, or equivalently a uniform income tax with investment subsidies at the same rate, can be improved on by taxing capital income more heavily than labour income.     

TO TAX OR NOT TO TAX? THE CASE OF ELECTRONIC COMMERCE

Despite the intensifying debate over the taxation of Internet commerce, the relevant issues have not been given a systematic treatment in the context of the literature on optimal taxation. This article presents such an analysis and investigates separately the taxation of business purchases of intermediate goods, the taxation of consumer purchases of final goods and services, and the various issues of administration and compliance costs as they apply to the development of E-commerce. The authors conclude that generally the optimal tax literature cannot be used in support of a blanket tax exemption for Internet purchases. Certain conditions could lead to the optimality of an exemption, but those conditions are not likely to be met in practice.     

Itemised Deductions: A Device to Reduce Tax Evasion

With direct incentives and sanctions being the most common instruments to fight tax evasion, the theoretical literature has tended to overlook indirect schemes, such as itemised deductions, in which one agent's behaviour affects the likelihood that others will declare their revenue. Itemised deductions provide an incentive for consumers to declare their purchases. This induces a partial shift in the demand from the black market to the legal one, for consumers need a transaction receipt to enjoy the tax deduction. I show that it is possible to increase tax proceeds by choosing a suitable level of itemised deduction, and this, for any level of taxation. Indeed, the cost for the tax authority on the consumers' side is more than compensated for by the extra proceeds generated on the sellers' side.     

ESTIMATING CAUSAL EFFECTS OF ALCOHOL ACCESS AND USE ON A BROAD SET OF RISKY BEHAVIORS: REGRESSION DISCONTINUITY EVIDENCE

A growing body of evidence suggests large increases in criminal behavior and mortality coinciding with a young adult's 21st birthday, when alcohol consumption becomes legal. The policy implications from these findings have focused on the need to reduce drinking among young people, potentially by enforcing stricter alcohol controls. However, mortality and arrests are relatively infrequent outcomes and relatively less is known about the intermediate and more prevalent consequences of legal access to alcohol at age 21. This paper uses the Add Health data combined with a regression discontinuity approach to examine the effects of alcohol access on sexual behavior, drunk driving, violence, and other outcomes. The results suggest relatively large effects that appear concentrated in men. The sample also allows some suggestive policy implications on whether changing the minimum drinking age may reduce these consequences. (JEL I12, I18)     

中国当前开征遗产税的必要性与可能性——以税收正义为视角

中国当前贫富差距日益扩大,需要建立有效的调控机制,抑制财富的不公平分配,个人所得税与消费税虽然具有调整社会财富分配的作用,但二者的税制模式限制了它们在税收正义上的效力,故有必要开征更具社会公平价值的遗产税,并且目前的经济发展水平、政治环境与道德水平以及法律环境为遗产税的开征提供了可能性。     

Optimal Capital Income Taxation with Means‐tested Benefits

This paper studies the interaction between capital income taxation and a means‐tested age pension. Our results document that the existence of a social insurance program financed from general revenue puts an upward pressure on the optimal tax rate. We also show that there is a negative relation between taper (benefit‐reduction) and optimal capital income tax rates. The potential welfare gain from optimizing capital taxation in the presence of a universal retirement transfer system is relatively higher. However, when the transfer is substantially means tested, the gain is lower, because the means test effectively operates as a tax on retirement capital.     

Neutral Property Taxation

A major difficulty in implementing land/site value taxation is imputing the land value of built‐on sites. The literature has focused on two alternatives. The first, residual site value, measures postdevelopment site value as property value less structure value, with structure value measured as depreciated construction costs. Residual site value would be relatively easy to estimate, but a residual site value tax system, which taxes land value before development and residual site value after development at the same rate is distortionary, discouraging density. The second, raw site value, measures postdevelopment site value as “what the land would be worth were there no building on the site (though in fact there is).” Raw site value taxation is neutral (does not distort the timing and density of development), but the estimation of postdevelopment raw site value would be complex so that assessment would likely be less fair and more arbitrary, contentious, and prone to abuse. This paper asks the question: Is it not possible to design a property tax system (taxation of predevelopment land value, postdevelopment structure value, and postdevelopment site value at possibly different rates) that employs the administratively simpler residual definition of postdevelopment site value and achieves neutrality? Under restrictive assumptions and subject to an important qualification, the paper provides an affirmative answer, and characterizes the tax rates that achieve neutrality. It also briefly discusses issues of practical implementation.     

效率与公平兼顾的最优所得税:理论框架及最优税率估计

最优所得税主要探讨税收如何兼顾公平与效率问题,以及给定公平偏好程度下,如何确定最优边际税率水平。即使在崇尚罗尔斯社会福利函数的社会里,政府同时兼顾再分配和财政收入目标的基础上,只要略加考虑税收对劳动供给的效应,哪怕是微弱的考虑和兼顾,最高边际税率都不会达到100%。而且,借鉴斯特恩最优线性所得税模型及美国个人所得税制度,估计我国现行个人所得税最高边际税率还可以适当降低到36%左右。     

An alternative approach to income taxation

We take an alternative approach to income taxation in this paper. We view the income tax schedule as the outcome of a voting process, rather than the optimal choice of a “benevolent social planner”. We show that it is very likely for majority voting to lead to the adoption of a regressive income tax schedule, depending on the per capita government revenue requirement and the mean productivity of the population, which is in sharp contrast with the result derived from the traditional “benevolent social planner” approach to income taxation; and that given the adoption of a regressive income tax schedule, the income tax schedule would become less regressive as the ratio of the per capita government revenue requirement over the mean productivity of the population increases. Our work might shed some light on both the prevalent adoption of regressive state tax systems and the cross-state difference in terms of tax systems.     

Taxation,insurance, and precautionary labor

We examine optimal taxation and social insurance with adverse selection in competitive insurance markets. In a previous literature, it has been shown that, with perfect insurance markets, social insurance improves welfare since it is able to redistribute without creating distortions. This result has been taken as robust to the introduction of adverse selection as this would only provide additional justifications for social insurance. We show, however, that adverse selection can weaken the case for social insurance compared to a situation with perfect markets. Whenever social insurance mitigates private underinsurance, it also causes welfare-reducing effects by decreasing precautionary labor supply and hence tax revenue. In addition, adverse selection may reduce the redistributive potential of social insurance. We illustrate our general results using different equilibrium concepts for the insurance market. Notably, we derive conditions under which a complete renunciation of social insurance is optimal and the government only relies on income taxation to achieve its redistributive objectives.     

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.     

IMPACT OF TAX, TRANSFER, AND EXPENDITURE POLICIES OF GOVERNMENT ON THE DISTRIBUTION OF PERSONAL INCOME IN CANADA

This is a study of the first order incidence of government taxation and expenditure policies on the incomes of families and unattached individuals in Canada in 1970. The specific purposes of the study are twofold. The first is to estimate for calendar year 1970 the first order incidence of governments'actual tax, transfer, and expenditure policies on spending units. The second objective is to simulate the changes in this incidence that would have occurred in 1970 if the new federal personal income tax, unemployment insurance, old age sccurity and family allowance programs had been in operation during that year. The methodology is similar to that used by W. Irwin Gillespie in his pioneering 1964 study for the Royal Commission on Taxation.
It is concluded that the 1970 incidence of the combined tax and transfer programs of all levels of government is broadly redistributive, with net incidence of federal government programs being considerably more redistributive than that of provincial and local governments. In general, the public sector provides large net benefits to families and individuals with incomes of less than $4,000, declining net benefits to families earning from $4,000 to $11,000 and levies small but increasing levels of net tax on families and individuals with incomes in excess of $11,000. This general conclusion is relatively insensitive to the precise assumptions made about the shifting of taxes and the distribution of expenditures on pure public goods. From simulation experiments, recent reforms of the federal income tax, unemployment insurance, old age security and family allowance systems were estimated to increase the amount of redistribution from the rich to the poor.     

THE WELFARE GAINS OF AGE‐RELATED OPTIMAL INCOME TAXATION

Using an overlapping generations model with skill uncertainty and private savings, we quantify the gains of age‐dependent labor income taxation. The total steady‐state welfare gain of switching from age‐independent to age‐dependent nonlinear taxation varies between 2.4% and 4% of GDP. Part of the gain descends from relaxing incentive–compatibility constraints and part is due to capital‐accumulation effects. The welfare gain is of about the same magnitude as that which can be achieved by moving from linear to nonlinear income taxation. Finally, the welfare loss from tax‐exempting interest income is negligible under an optimal age‐dependent labor income tax.     

The complex attitudes to alcohol taxation

Alcoholic beverages are taxed at very different rates across the EU, which implies extensive cross-border shopping. Therefore, there is an ongoing debate about harmonization of alcohol taxes among countries. Sweden, with a tradition of high alcohol taxes due to public health arguments, has the highest excise duties on spirits in the EU. But, because of this, the occurrence and possible problems caused by cross-border shopping are also extensive. Using a questionnaire survey I analyse the Swedes’ attitudes to alcohol taxation and find that these two sides of the coin are important determinants. Many respondents want to decrease the alcohol tax, while some even want to increase it. Those most positive to alcohol taxation are those who regard increased alcohol consumption as a worrying problem and those living in areas where many adults are treated for alcohol-related diseases. However, the ordered-probit analysis also shows that those who support the EU membership are more supportive of reduced taxation to harmonize the Swedish tax with those in other EU countries. Those who live in regions where privately imported alcohol is substantial are also more reluctant to alcohol taxation.     

Distortionary company car taxation: deadweight losses through increased car ownership

We analyse the effects of distortionary company car taxation through increased household car consumption for the Netherlands. We use several identification strategies and demonstrate that for about 20 % of households company car possession increases car ownership. The annual welfare loss of distortionary company taxation through increased car ownership is generally rather small, maximally €120 per company car, and much less than the welfare loss through increased expenditure on the company car. However, for policies that exempt households from paying tax on their company car, the annual deadweight loss is likely higher. Our first-best tax policy recommendation is to increase company car tax rates. However, our current results suggest that a second-best policy, which keeps average company car taxation constant but which reduces the marginal tax on cheaper cars and increases the marginal tax on expensive cars, would be welfare improving as overconsumption of company cars will be reduced.     

Uncertainty, Commitment, and Optimal Taxation

This paper examines the optimal tax design problem in the presence of wage uncertainty. The wage has a continuous distribution, individuals are ex ante identical, preferences are separable in labor supply and goods, public policy aims at providing the population with social insurance, and the only restriction on the tax instruments is that emanating from lack of public observability of realized wages and labor supplies. We show that optimal tax structures depend crucially on whether it is labor supply or goods that consumers have to commit to before the resolution of uncertainty. Specifically, we prove that, in the absence of commitment, the social insurance problem collapses to the traditional optimal tax problem. Second, if labor supply is precommitted, it would be possible to effect a first-best outcome. Third, commitment to goods would make indirect taxation a useful instrument of tax policy even in the presence of a general income tax; it requires differential tax treatment of committed and noncommitted goods. Finally, if preferences are separable between the two types of goods, precommitted goods must be taxed at a uniform rate lower than that on the noncommitted goods.     

Relative Wealth, Consumption Taxation, and Economic Growth

This paper examines the role of the relative wealth-induced status motive in affecting the neutrality of consumption taxation in an optimizing growth model. It is found that a key factor determining the validity of the neutrality of consumption taxation in both the level sense and the growth rate sense is the desire for relative wealth-induced social status. When individuals care about their relative wealth, a rise in consumption tax enhances the steady-state level of capital stock and consumption. Furthermore, if the production function takes a linear technology form as the engine of sustained growth, then increases in consumption taxation raise the economy's long-run growth rate. In addition, an optimal consumption tax policy provides full subsidies to consumption so as to induce the economy to achieve the social optimum and the optimal growth rate.     

Measuring tax efficiency: A tax optimality index

This paper introduces an index of tax optimality that measures the distance of some current tax structure from the optimal tax structure in the presence of public goods. This index is defined on the [0, 1] interval and measures the proportion of the optimal tax rates that will achieve the same welfare outcome as some arbitrarily given initial tax structure. We call this number the Tax Optimality Index. We also show how the basic methodology can be altered to derive a revenue equivalent uniform tax, which measures the tax burden implied by the public sector. A numerical example is used to illustrate the method developed, and extensions of the analysis to handle models with multiple households and nonlinear taxation structures are undertaken.     

Tax Base and Crowding‐in Effects of Balanced Budget Fiscal Policy

A dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax‐financed increase in government expenditures can lower the tax rate through a demand‐induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending.