nep-pub New Economics Papers
on Public Finance
Issue of 2005‒01‒23
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Redistributive Taxation in a Search Equilibrium Model By Hungerbühler, Mathias; Lehmann, Etienne; Parmentier, Alexis; Van der Linden, Bruno
  2. On the Optimal Progressivity of the Income Tax Code By Juan Carlos Conesa; Dirk Krueger
  3. Measuring Social Security's Financial Problems By Jagadeesh Gokhale; Kent Smetters
  4. Social security and entrepreneurial activity By Thomas Steinberger
  5. "On Fiscal Federalism under Democracy" By Nobuo Akai; Kazuhiko Mikami

  1. By: Hungerbühler, Mathias (IRES, Catholic University of Louvain and ERMES, University of Paris 2); Lehmann, Etienne (ERMES, University of Paris 2, IRES, Catholic University of Louvain and IZA Bonn); Parmentier, Alexis (EUREQua, University of Paris 1 and ERMES, University of Paris 2); Van der Linden, Bruno (IRES, Catholic University of Louvain, FNRS, Belgium, ERMES, University of Paris 2 and IZA Bonn)
    Abstract: This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labor markets. Redistributive taxation distorts labor demand and wages. Compared to their efficient values, gross wages, unemployment and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees (1971) setting.
    Keywords: optimal income taxation, unemployment, wage bargaining, matching
    JEL: D82 H21 H24 J64
    Date: 2005–01
  2. By: Juan Carlos Conesa; Dirk Krueger
    Abstract: This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.
    JEL: E62 H21 H24
    Date: 2005–01
  3. By: Jagadeesh Gokhale; Kent Smetters
    Abstract: The U.S. Social Security system has helped keep many retirees out of poverty. However, according to the Social Security and Medicare Trustees, Social Security faces a future financial shortfall of $10.4 trillion in present value. This enormous imbalance has received little attention in public debates about Social Security. Instead, the media and policymakers continue to focus on the program's trust fund and several other ad-hoc measures that create a misleading impression of the size of Social Security's financial problem. Although the Social Security Trust Fund is not projected to be exhausted until 2042, Social Security's $10.4 trillion present value imbalance is accruing interest and will grow by $600 billion during 2004 alone. The current cash-flow federal budget, however, is biased against reforms that would improve Social Security's finances. As shown herein, a new federal accounting system would remove this bias.
    JEL: H0 H6
    Date: 2005–01
  4. By: Thomas Steinberger (CSEF, University of Salerno)
    Abstract: We solve the dynamic occupational choice problem of a finitelylived, borrowing constrained household which faces exogenously given stochastic wages and business returns. Entrepreneurship means investing personal wealth into a risky asset and neither receiving wage income nor paying social security contributions. Social security bene- fits in retirement depend on the number of contribution periods. We show that, entrepreneurial activity depends negatively on the generosity of the social security system and non-monotically on the size of the system. Numerical results for a multi-period version suggest that for reasonable parameter values the relationship between the size of the social security system and entrepreneurial activity is negative. In simulation experiments, we find that lowering social security contributions for the young has a relatively larger effect on entrepreneurial activity than other ways to reduce the size of the system.
    Keywords: Occupational choice, Life-cycle models, Social security
    JEL: H55 G11 J24
    Date: 2005–01–01
  5. By: Nobuo Akai (Department of Organizational Management, University of Hyogo); Kazuhiko Mikami (Department of Applied Economics, University of Hyogo)
    Abstract: In his seminal work on fiscal federalism, Oates (1972) addressed the socalled Decentralization Theorem, which states that, if such factors as scale economies and spillovers are left out of consideration, a decentralized system is always more efficient than a centralized system for the supply of local public goods. Based on his analytical framework, we contrarily show that a centralized system is at times more efficient than a decentralized system under a democratic decision rule (Proposition 2). The key to such a possibility is the interests of minorities that may be sacrificed in each lower district under decentralization. That is, when the majority adopts an extreme policy that is far from minorities' tastes in a lower district under decentralization, if instead a moderate policy which is closer to minorities' tastes were chosen under centralization, then the interests of minorities would be saved. As a result, centralization could attain higher social welfare than decentralization.
    Date: 2005–01

This nep-pub issue is ©2005 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.