COMMODITY TAX STRUCTURE AND INFORMAL ACTIVITY

Commodity tax structure affects the firm's choice between formality and informality. An increase in the specific tax rate, relative to an equivalent increase in ad valorem taxation, makes informality attractive to more firms. Formality becomes attractive at lower levels of profits under ad valorem taxation. For both the maximization of welfare subject to a revenue constraint and the unconstrained maximization of revenue, the optimal rate of specific taxation is zero.     

Foreign Aid,Government Spending,and the Environment

Using an endogenous growth model, this paper examines the growth and welfare effects of the allocation of foreign aid in the recipient economy. As public inputs are a productive factor, a rise in the allocation of aid to the public inputs increases growth and hence the welfare of the economy. However, raising the ratio of aid to pollution abatement may not help an economy, because it crowds out public inputs. Since public inputs are also partly financed by income taxation, the welfare‐maximizing income tax rate is larger than the growth‐maximizing rate, because a portion of the aid constitutes a lump‐sum transfer and can increase household consumption and hence welfare.     

Should the Carbon Price Be the Same in All Countries?

International differences in fuel taxation are huge, and may be justified by different local negative externalities that taxes must correct, as well as by different preferences for public spending. In this context, should a worldwide uniform carbon tax be added to these local taxes to correct the global warming externality? We address this question in a second best framework à la Ramsey, where public goods have to be financed through distortionary taxation and the cost of public funds has to be weighted against the utility of public goods. We show that when lump‐sum transfers between countries are allowed for, the second best tax on the polluting good may be decomposed into three parts: one, country‐specific, dealing with the local negative externality, a second one, country‐specific, dealing with the cost of levying public funds, and a third one, global, dealing with the global externality and which can be interpreted as the carbon price. Our main contribution is to show that the uniformity of the carbon price should still hold in this second best framework. Nevertheless, if lump‐sum transfers between governments are impossible to implement, international differentiation of the carbon price is the only way to take care of equity concerns.     

The effects of taxation,price control and government contracts in oligopoly and monopolistic competition

Many government contracts with or policies towards oligopolistic sectors essentially involve private firms selling a given proportion (ϑ), or quantity, of output to the government at a fixed price (P_R) with the remainder being sold on the open-market. Often this is combined with consumer rationing. Examples include cement and sugar in India, and health, housing and defence in many countries. The paper investigates the effects of these schemes (including sales and excise taxation) on prices, output and household welfare under oligopoly and monopolistic competition. Less government control (reduced ϑ) may raise prices and tax shifting can be above or below 100 percent.     

Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly in General Equilibrium

Employing a general equilibrium framework, Blackorby and Murty prove that, with a monopoly and under 100% profit taxation and uniform lump‐sum transfers, the utility possibility sets of economies with unit and ad valorem taxes are identical. This welfare equivalence is in contrast to most previous studies, which demonstrate the superiority of the ad valorem tax in a partial equilibrium framework. In this paper, we relax the assumption of 100% profit taxation and allow the consumers to receive profit incomes from ownership of shares in the monopoly firm. We find that, under certain regularity conditions, for any fixed vector of profit shares, the utility possibility sets of economies with unit and ad valorem taxes are not generally identical. But it does not imply that one completely dominates the other. Rather, the two utility possibility frontiers cross each other. Additionally, employing a standard partial equilibrium welfare analysis, we show that the Marshallian social surpluses resulting from the two tax structures are identical when the government can implement unrestricted transfers.     

Income and substitution effects of fiscal policy on work effort

The focus of this paper is twofold. First, it examines the impact on work effort of changes in government purchases financed with lump‐sum taxes, in a neoclassical framework, with respect to four industrialised countries. Second, it reconsiders the expenditure–work effort relationship in a broader conceptual context that allows for distortionary taxation and a disaggregation of the income and substitution effects. Our findings are shown to cast doubt on the empirical plausibility of the prevailing (neoclassical and New Keynesian) models which seem to rely heavily on the lump‐sum tax notion, thus ignoring the substitution effects of distortionary taxation.     

Imported inputs and privatization in downstream mixed oligopoly with foreign ownership

This paper examines welfare implications of privatization in a mixed oligopoly with vertically related markets, where an upstream foreign monopolist sells an essential input to public and private firms located downstream in the domestic country. The impact on domestic welfare of privatizing the downstream public firm is shown to contain three effects. The first is an output distortion effect, which negatively affects welfare since privatization decreases the production of final good for consumption. The second is an input price lowering effect resulting from a decrease in derived demand for the input. When the level of privatization increases, a decrease in final good production lowers input demand, causing input price to decline and domestic welfare to increase. The third is a rent‐leaking effect associated with foreign ownership in the downstream private firm. The rival domestic firm strategically increases its final good production, causing profits accrued to foreign investors to increase and domestic welfare to decline. Without foreign ownership in the downstream private firm, the optimal policy toward the public firm is complete privatization as the output distortion effect is dominated by the input price lowering effect. With foreign ownership, however, complete privatization can never be socially optimal due to the additional negative impact on domestic welfare of the rent‐leaking effect. We further discuss implications for domestic welfare under different privatization schemes (e.g., selling the privatization shares to the upstream foreign monopolist or to the rival domestic firm).     

Impact of international trade under dual labor markets

A country's unemployment rate can be affected by technology choice and the opening of international trade. This general equilibrium model examines the impact of international trade with the presence of dual labor markets in which manufacturing firms engage in oligopolistic competition and choose technologies with different marginal and fixed costs to maximize profits. In a closed economy, it is shown that an increase in labor market efficiency or a population increase induces manufacturing firms to adopt more advanced technologies and the wage rate in the manufacturing sector increases. With the existence of a continuum of technologies, technology choice is not a source of firm heterogeneity. The opening of international trade leads to an increase in the wage rate in the manufacturing sector and the price of the agricultural good. When countries are identical, international trade always increases national welfare.     

THE CURSE OF WINDFALL GAINS IN A NON RENEWABLE RESOURCE OLIGOPOLY*

In this paper, we consider oligopolistic equilibria in subgame‐perfect strategies in continuous time, and investigate the effect of stock discovery on the profits of non‐identical natural resource oligopolists. We show that a uniform addition to all stocks does not necessarily increase the discounted sum of profits of all firms.     

MONETARY EXPANSION AND PRODUCTIVE PUBLIC EXPENDITURE IN A CASH‐IN‐ADVANCE ECONOMY*

Using a dynamic optimization model that incorporates a cash‐in‐advance constraint on both consumption and investment and productive public capital financed by a lump‐sum tax and seigniorage, this paper analyses the steady‐state effects of an increase in the inflation rate (the money growth rate) on output, private capital and welfare. The effects are negative at high inflation rates. However, at low inflation rates, the effects depend on the amount of lump‐sum tax revenue collected and therefore are either positive or negative.     

Policy commitment and the welfare gains from capital market liberalization

This paper evaluates the quantitative impact of capital liberalization on the taxation structure and welfare of the liberalizing countries when governments conduct fiscal policy optimally but without commitment (time-consistent policies). The transition from a regime of capital autarky to a regime of free mobility leads to a decrease in the long-term tax rate on capital of 13 percent and an increase in the tax rate on labor of 2 percent. As a consequence of this taxation shift, welfare increases by about 1 percent. The reduction in capital taxation induced by capital market liberalization is welfare improving because, in the absence of capital mobility, the time-consistent policies over-tax capital.     

MACROECONOMIC AND REDISTRIBUTIONAL EFFECTS OF CONSUMPTION TAXES IN THE USA*

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump‐sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare‐improving for the current low‐income households.     

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.     

Regulating an Externality-Generating Utility Environmental Taxes Under Limited Information

Global warming is currently an important item on most nationalenvironmental agendas. In many countries, coal-fired electricity generatingstations represent an important source of greenhouse gases. We examinehow regulations to curb emissions affect public utility pricing regulationwhen regulators act non-cooperatively. We show that, when there is limitedinformation on fixed abatement costs, an environmental regulator prefersan emission tax over an output tax or a lump sum environmental tax. Thepublic utility regulator prefers the lump sum tax regime.     

A welfare anomaly in the rate-of-return regulated monopoly model which creates opportunities for offsetting taxation and regulatory policies

The impact of the property tax on a fair rate of return regulated firm is examined. We find that a change in the tax rate has exactly the same effect on factor employment, output and hence the price as an equivalent change in the allowed rate of return. However, an increase in the allowed rate of return will lead to higher profits, whereas the same increase in the property tax rate will decrease profits. We find that an increase in the tax rate or allowed rate of return may result in a net increase in social welfare. This result contradicts the long-established belief that a lower (or no) tax is preferred to a higher tax rate in maximizing welfare. Finally, a linear iso-welfare locus is derived which creates the possibility of the regulatory agency or the tax authority offsetting the negative effects of the other's policy.     

Does tax competition make mobile firms more footloose?

We examine a two‐period regional model with evolving economic geography, potentially creating incentives for firm relocation between periods. We argue that tax competition makes firms more footloose, but that this increases efficiency relative to the laissez‐faire outcome. We establish that: (i) tax competition leads to efficient investment outcomes and (ii) firm mobility is greater with tax competition than with a laissez‐faire regime. When relocation is costly, there can be too little mobility over time, as firms do not take into account the impact of FDI on social welfare in each country. With lump‐sum taxes or transfers, firms capture these benefits and internalize them, such that tax competition leads to the efficient outcomes. When more time periods are examined, tax competition induces firm relocation sooner than in its absence.     

Regional versus Multilateral Trade Liberalization,Environmental Taxation,and Welfare

The paper considers trade between identical countries with imperfectly competitive markets, and compares the impacts of regional and multilateral tariff reduction on strategic environmental taxation and welfare. While both forms of trade liberalization increase production and consumption in tariff‐reducing countries, regionalism also reduces production in a non‐participating country and may decrease its consumption. Consequently, regionalism and multilateralism change pollution tax and welfare in the tariff‐reducing countries in similar ways when pollution is local, but in dissimilar ways for global pollution. When pollution is global, regionalism is likely to be preferred to multilateralism for the establishment of free trade among countries.     

Optimal fiscal policy in sunspot‐driven oligopolistic economies

Economies with oligopolistic markets are prone to inefficient sunspot fluctuations triggered by autonomous changes in firms equilibrium conjectures. A well‐designed taxation‐subsidization scheme can eliminate these fluctuations by coordinating firms in each sector on a single equilibrium, left unaffected. The optimal taxation scheme must select the number of active firms that makes the best trade‐off (in terms of consumer welfare) between the markup and the scale inefficiency distortions. Implementing such stabilization policy leads to significant welfare gains, attributable to an “efficient stabilization effect,” typically ignored in usual computations of the welfare costs of fluctuations.     

Taxation of capital income in overlapping generations economies

Whether capital income should be taxed in overlapping generations economies is vividly discussed. It is shown that intergenerational lump‐sum taxes cannot implement the Golden Rule allocation when agents have private information on their earnings potential. Hence, the seminal Atkinson–Stiglitz result that optimal income taxation pre‐empts any role for indirect taxation cannot be interpreted to imply that capital income taxation (affecting intertemporal relative prices) should not be taxed. Specifically, capital income should unambiguously be taxed in small open economies, and the optimal tax rate depends inversely on the elasticity of total savings to disposable income and the after‐tax rate of return.     

Corporate social responsibility and tax avoidance

We theoretically analyse the relationship between corporate social responsibility (CSR) and tax avoidance of an oligopolistic firm. The firm maximizes a weighted sum of profits and a CSR objective that depends on output and the firm's contribution to public good provision, that is, tax payments. Making one CSR element more important induces the firm to adhere less to the other and to reduce tax avoidance. Hence, simultaneously a substitutive and a complementary relationship between CSR and tax avoidance can be observed. Therefore, using composite indicators of CSR prevents an empirical identification of this linkage. Moreover, if tax avoidance declines, CSR activities will increase. Consequently, the overall link between CSR and tax avoidance is theoretically ambiguous.