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).     

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.     

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.     

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.     

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.     

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.     

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.     

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 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.     

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.     

Corporate taxation and the optimal investment decisions of firms

The effects of a corporate profits tax on the choice of technique depends on the criterion used to make this choice. Harberger concluded that it would alter the optimal techniques because he was implicitly assuming that firms try to maximise the internal rate of return on their investment. Stiglitz, using the maximisation of present value criterion, with a rate of interest lower than the rate of profits, concluded that the optimal techniques would not be affected by this tax. The appropriate criterion depends on the assumptions made about the scope for entrepreneurial activity and its relation to capital.     

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.     

The credibility of commitment and optimal nonlinear savings taxation

Previous studies that examine optimal nonlinear taxation of savings/capital have assumed either full-commitment or no-commitment by the government. This raises the question as to whether the results under full-commitment and no-commitment provide upper and lower bounds on the optimal marginal savings tax rates. This paper shows that they do not. Specifically, we consider an infinite-horizon overlapping generations model in which agents attach some probability to whether or not the government can commit. When these probabilistic beliefs differ among high-skill individuals, the optimal steady-state marginal savings tax rates may fall outside those under the polar cases of full-commitment and no-commitment. Our numerical analysis finds that this theoretical possibility can occur under a baseline calibration with empirically plausible values of model parameters, and that it remains qualitatively robust with respect to various parametric changes.     

Foreign (in)direct investment and corporate taxation

Abstract Foreign investments of multinational firms are often complex in that they involve conduit entities. In particular, a multinational can pursue either a direct or an indirect investment strategy, where the latter involves an intermediate corporate entity and is associated with enhanced opportunities for international tax planning. As a consequence, in the case of indirect investments, the role of corporate taxation in destination countries may change. This paper investigates the effects of corporate taxation on foreign investment decisions of German multinationals, taking explicitly into account that firms choose in a first stage the investment regime (direct vs. indirect). The empirical findings, consistent with theoretical predictions, suggest that tax effects differ according to whether the investment is direct or indirect.     

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.     

Altruism,jealousy and the theory of optimal non-linear taxation

This paper studies optimal non-linear taxes in a world in which there is altruism and jealousy. A formula for optimal marginal tax rates is derived which turns out to be a simple and intuitively appealing extension of a result due to Mirrlees. The paper shows that in this sort of economy all of optimal tax theory's general results either no longer hold or need not hold, and it sets out appropriate modifications to standard tax rules.     

Equivalence scales,horizontal equity and optimal taxation under utilitarianism

This paper analyzes the question of how differences in family size should be treated by the income tax system in order to achieve horizontal equity. Family size is incorporated into the demand system by the procedure of demographic scaling. Horizontal equity is defined as ‘equal treatment of equals’. It is shown that when lump-sum taxes are not available and the government has to rely on income taxation, then the only way to entail equal utilities for household of different size is to equate the labor supplies and the per-standard-adult consumptions of these households.     

On the switch from direct to indirect taxation

The paper is concerned with the inter-relationship between the theoretical specification of household behaviour and the application of econometric results to the analysis of public policy. The first part of the paper discusses the relationship between the optimum tax literature and econometric specification of point labour supply and commodity demands. The second part introduces an ‘activity model’ of the allocation of money and time, which generalises the standard linear expenditure system, and describes the preliminary results of estimating the model for the United Kingdom Family Expenditure Survey data for 1973. The remainder of the paper uses the estimates to examine the effect of reducing income taxation and increasing value added tax on both labour supply and welfare.     

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.