nep-pub New Economics Papers
on Public Finance
Issue of 2005‒01‒16
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Progressive Taxation and Irreversible Investment under Uncertainty By Luis H. R. Alvarez; Erkki Koskela
  2. Demographics and the Political Sustainability of Pay-as-you-go Social Security By Theodore C. Bergstrom; John L. Hartman
  3. On the Incidence of a Tax on Pure Rent with Infinite Horizons By Alberto Petrucci
  4. Optimal Taxation in an RBC Model: A Linear-Quadratic Approach By Pierpaolo Benigno; Michael Woodford
  5. Walking inside the Potential Tax Evader's Mind By Juan Carlos Molero; Francesc Pujol

  1. By: Luis H. R. Alvarez; Erkki Koskela
    Abstract: We analyze the impact of progressive taxation on irreversible investment under uncertainty. We show that if tax exemption is lower than sunk cost, higher tax rate will decelerate optimal investment by increasing the optimal investment threshold, while if tax exemption exceeds sunk cost, three different regimes arise. For "small" volatilities the optimal investment threshold is a positive function of volatility, but independent of tax rate. For "medium" volatilities it is independent of both tax rate and volatility. Finally, for "high" volatilities the optimal investment threshold depends positively on volatility, but negatively on tax rate so that we have "tax paradox".
    Keywords: irreversible investments under uncertainty, progressive taxation
    JEL: D80 G31 H25
    Date: 2005
  2. By: Theodore C. Bergstrom; John L. Hartman
    Abstract: The net present value of costs and benefits from a pay-as-you-go social security system are negative for young people and positive for the elderly. If people all vote their financial self-interest, there will be a pivotal age such that those who are younger favor smaller social security benefits and those who are older will favor larger benefits. For persons of each age and sex, we estimate the expected present value gained or lost from a small permanent increase in the amount of benefits, where the cost of these benefits is divided equally among the population of working age. Assuming that everyone votes his or her long run financial self-interest, and calculating the number of voters in the population of each age and sex, we can determine whether there is majority support for an increase or a decrease in social security benefits. We use statistics on the age distribution and mortality rates for the United States to explore the sensitivity of political support for social security to alternative assumptions about the discount rate, excess burden in taxation, voter participation rates, and birth, death, and migration rates. We find that a once-and-for-all decrease in benefits would be defeated by a majority of selfish voters under a wide range of parameters. We also study the predicted majority outcomes of votes on changing the retirement age.
    JEL: H53
    Date: 2005
  3. By: Alberto Petrucci (LUISS G. Carli)
    Abstract: This paper studies the incidence of a tax on pure rent within an intertemporal optimizing model of capital accumulation and endogenous labor with infinite-lived agents. Two cases are considered for the labor market: the neoclassical theory, characterized by perfectly competitive wages and no unemployment, and the incentive-wage theory of the labor-turnover type, characterized by real wage rigidity and structural unemployment. In the neoclassical equilibrium, the land rent tax is unshifted when consumers are lump-sum compensated for the tax. If tax revenues are used to finance government spending, pure rent taxation increases employment, boosts capital accumulation and reduces real wage as well as land yield. In the incentive-wage economy, the land rent tax, regardless of the way in which tax proceeds are employed, always increases employment, capital stock, and land reward, but exerts an ambiguous effect on the wage rate.
    Keywords: Pure rent taxation, Capital formation, Land, Structural unemployment
    JEL: E21 E62 H22
    Date: 2004–12
  4. By: Pierpaolo Benigno; Michael Woodford
    Abstract: We reconsider the optimal taxation of income from labor and capital in the stochastic growth model analyzed by Chari et al. (1994, 1995), but using a linear-quadratic (LQ) approximation to derive a log-linear approximation to the optimal policy rules. The example illustrates how inaccurate "naive" LQ approximation --- in which the quadratic objective is obtained from a simple Taylor expansion of the utility function of the representative household --- can be, but also shows how a correct LQ approximation can be obtained, which will provide a correct local approximation to the optimal policy rules in the case of small enough shocks. We also consider the numerical accuracy of the LQ approximation in the case of shocks of the size assumed in the calibration of Chari et al. We find that the correct LQ approximation yields results that are quite accurate, and similar in most respects to the results obtained by Chari et al. using a more computationally intensive numerical method.
    JEL: C63 H21
    Date: 2005–01
  5. By: Juan Carlos Molero (School of Economics and Business Administration, University of Navarra); Francesc Pujol (School of Economics and Business Administration, University of Navarra)
    Abstract: The classical Allingham-Sandmo-Yitzhaki model explains tax evasion behavior based on the probability of being discovered, the amount of the fine imposed and the level of risk aversion. Nonetheless, empirical studies show that the decision and the level of tax evasion depends also on non economic considerations, usually named as the "psychological costs" associated to tax evasion. We build a theoretical model of tax evasion including non monetary considerations. We propose an empirical study on the determinants of the psychological costs of tax evasion, based on the theoretical taxonomy proposed by Lagares (1994). Data come from a questionnaire filled by 781 university students. The dependent variable is the percentage of students considering acceptable to evade taxes. Using a binomial logit model we find that the justification of tax evasion is statistically related with: the presence of grievance in absolute terms (those who feel that taxes are too high; waste of public funds) and grievances in relative terms (the suspected level of tax evasion by others, those accepting black economy labor). The sense of duty and the level of solidarity are also relevant factors, but in a lesser extent.
    JEL: H26
    Date: 2005–01

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