REDISTRIBUTIVE EFFECT OF INCOME TAXATION: DECOMPOSING TAX BASE AND TAX RATES EFFECTS

This paper introduces Gini-based decomposition formulae for the redistributive effect of income taxation. It examines the interaction between and the relative significance of tax base and tax rate components in the final determination of the overall redistributive effect. The resulting formulae can readily be applied to available income and tax statistics.     

A DYNAMIC MODEL OF CLEANUP: ESTIMATING SUNK COSTS IN OIL AND GAS PRODUCTION

The environmental remediation required to permanently decommission most industrial projects is an expensive, irreversible investment. Real options literature shows that temporary closure has value under uncertainty. However, even if there is no intention to restart operations, there is an incentive to label a closure as “temporary” to avoid having to remediate ongoing or future environmental externalities. I estimate a dynamic discrete choice model of closure under price and quantity uncertainty to evaluate the likelihood of reactivation. The model reveals that the option to temporarily close is being widely used to avoid environmental remediation of oil and gas wells in Canada.     

FISCAL POLICY AND OPTIMAL TAXATION: EVIDENCE FROM A TAX SMOOTHING EXERCISE

Testing the tax smoothing hypothesis for the EU‐15, we hypothesise that the introduction of the 3%‐deficit rule of the Maastricht Treaty in 1993 may have inhibited tax smoothing as European Union (EU)‐member states are no longer capable of letting the deficit grow as much as implied by expected decreases in government expenditure. Our results show that for some countries this fiscal rule may have indeed changed the validity of the tax smoothing hypothesis, thus implying that EU accession has caused welfare losses.     

PROFIT TAX AND FIRM MOBILITY IN A THREE‐COUNTRY MODEL

We construct a three‐country model that incorporates international relocation by imperfectly competitive firms and examine both the effects of each country's profit tax reduction on the consumption and welfare of all countries, and the incentive for the countries to decrease the profit tax. In such a model, both the terms of trade and international relocation of firms offer the key to understanding the impacts of one country's profit tax policy. In particular, we note that the relocation of firms from the other two countries is positively related to the wage incomes of the third country through a shift in labour demand, and the terms‐of‐trade improvement is not only positively related to the wage incomes, but also negatively related to profit incomes through a shift in world consumption demand. We show that (i) in a three‐country world economy, regardless of the reduction's source, the profit tax reduction of each country leads to relocation of firms away from foreign countries toward its own economy and deteriorates the terms of trade of its economy and (ii) this becomes a ‘beggar‐thy‐neighbour’ policy in the sense that it lowers the welfare of the other foreign countries.     

SUNK COSTS OF CAPITAL AND THE FORM OF ENTERPRISE: INVESTOR‐OWNED FIRMS AND WORKER‐OWNED FIRMS*

ABSTRACT ** : This paper examines implications of sunk costs of capital for efficient forms of enterprise. It is assumed that firm owners and outside traders are asymmetrically informed of venture risks, and that there are sunk costs associated with investment in physical and human capital. We then make an efficiency comparison between investor‐owned and worker‐owned firms. We find that the firm is efficient when it is owned by the input supplier (the investor or worker) who incurs large sunk costs. This is because such an input supplier can credibly signal to the other input supplier that he in fact has a safe project. An empirical study based on the Japanese manufacturing industry seems to support the theoretical result.     

THE VANISHING BEQUEST TAX: THE COMPARATIVE EVOLUTION OF BEQUEST TAXATION IN HISTORICAL PERSPECTIVE

Bequest tax revenues have been declining in OECD countries for at least 70 years. We propose an explanation that is based on a dynamic politico‐economic model where the evolution of bequest taxation is determined by wealth inequality. Since economic development induces a growing role of labor income and thus a reduction of wealth inequality, bequest taxation is reduced over time. The model also embeds a process of structural reallocation from agriculture to manufacturing and a consequent shift of the tax base from easy‐to‐tax land to hard‐to‐tax capital. This process implies a lower tax level and slower equalization‐induced tax reduction, the higher is the tax avoidance rate and the less developed is the economy. The introduction of franchise restrictions which are gradually lifted over time allows the hump‐shaped long‐term evolution of bequest taxation to be reproduced starting from the nineteenth century for those countries that are now modern industrial democracies. The evolution of political institutions also helps to explain the discrepancies currently observed between tax systems in developed and underdeveloped countries.     

THE TAX REFORM ACT OF 1986: CONCENTRATED COSTS, DIFFUSE BENEFITS—AN INVERSION OF PUBLIC CHOICE

The public choice paradigm asserts the superior force of concentrated benefits over diffuse costs in the political marketplace. Vote-seeking politicians exchange favors for support to members of special interest groups, whereas the public at large places fewer demands on and have less clout with politicians. The historical evolution of the federal income tax fits the public choice paradigm. Each provision in the tax code benefits primarily a narrow interest. Little incentive exists for anyone to represent such general interests as a broad-based, low-rate, simple tax system.
The Tax Reform Act of 1986 inverted the public choice paradigm. The general interest, in the form of lower tax rates, prevailed over legions of special interests—which lost their prized deductions. The reason for this inversion lay in the power of an idea—the political and economic appeal of a low top rate. Deductions were simply worth less at lower deductible rates, and the benefits of higher after-tax income were readily apparent. A coalition of liberals seeking the abolition of special breaks for the rich and conservatives favoring the enhanced incentives in sharply lower tax rates together defeated the community of special interest groups.     

INCENTIVE AND INSURANCE EFFECTS OF INCOME TAXATION

Tax distortions cause a trade‐off between efficiency and equity. However, taxes not only affect incentives; they also provide implicit insurance, and this may critically affect the efficiency–equity relationship. For a standard labour supply problem it is shown that the insurance effect mutes the sensitivity of labour supply to taxes, which tends to reduce tax distortions and lower the marginal costs of public funds. The relation between incentives and insurance and thus efficiency and equity is flattened by the insurance effect and it may even be non‐monotone. However, the optimal utilitarian policy implies that there is always a trade‐off between efficiency and equity on the margin.     

TAX COMPETITION IN A SIMPLE MODEL WITH HETEROGENEOUS FIRMS: HOW LARGER MARKETS REDUCE PROFIT TAXES*

We set up a simple two‐country model of tax competition where firms with different productivity decide in which location to produce and sell output. In this model, a unique, asymmetric Nash equilibrium is shown to exist, provided that countries are sufficiently different with respect to their exogenous market size. Sorting of firms occurs in equilibrium, as the smaller country levies the lower tax rate and attracts the low‐cost firms. A simultaneous expansion of both markets that raises the profitability of firms intensifies tax competition and causes both countries to reduce their tax rates, despite higher corporate tax bases.     

AGENCY COSTS OF THIRD-PARTY FINANCING AND THE EFFECTS OF REGULATORY CHANGE ON UTILITY COSTS AND FACTOR CHOICES

ABSTRACT ** :  Beginning in 1999, the Canadian Province of Ontario undertook restructuring and tried to implement performance based regulation for local electricity distribution utilities. Regulatory parameters were based on productivity research covering 1988–1997 that found little productivity difference by size, but wide variations in costs, factor mix, financing, and returns to capital among utilities. While some utilities questioned their ability to improve efficiency, other observers maintained many utilities were over-capitalized, especially from third-party financing paid by customers for connection/development charges; these observers noted that rates, profits, and valuations would be inflated. Despite its pervasive use, we can find no literature dealing with the implications of third-party funding. We assess the effects and adjustment dynamics of regulatory and financing changes on costs, factor mix, and performance.     

PUBLIC INVESTMENT,TAXATION AND TRANSFER OF TECHNOLOGY

A low‐wage developing economy (South) is interested in accessing and attracting superior technology from a high‐wage developed economy (North) with firms having heterogeneous quality of technology. To improve upon the initial market equilibrium, which shows that relatively inefficient technologies will move to the South, the host government invests in infrastructure financed through taxing the foreign firms. We discuss the problem of existence of such a tax‐transfer mechanism within a balanced budget framework. We argue that such a policy can increase tax revenue as well as instigate the transfer of better quality technology. It turns out that this policy is more likely to be successful when the production concerns high‐value, high‐price products in low‐wage economies. Our results improve upon the conventional strategy of a tax break.     

VOLUNTARY CONTRIBUTIONS TO A PUBLIC GOOD: NON-NEUTRALITY RESULTS

Abstract.  We show that the well-known neutrality theorem (that a small redistribution of wealth does not affect the aggregate private provision of a public good) no longer holds if agents take into account the effect of their individual supply of the public good on the relative price of private goods.     

INCOME REDISTRIBUTION THROUGH THE TAX SYSTEM: A SIMULATION ANALYSIS OF TAX REFORM

In this paper, we consider reforming the tax system to a comprehensive income tax model in order to amend the differential treatment of income sources. Our simulation analysis shows that the tax reform improves the effectiveness of the tax system on the redistribution of all sources of income including earned income, financial wealth income, and imputed rent. The analysis of incidence of the tax reform suggests that the tax burden for young renters decreases the most and that for young loan-free land owners increases the most through this tax reform.