nep-pub New Economics Papers
on Public Finance
Issue of 2005‒02‒13
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Viable Taxation By Perroni, Carlo; Scharf, Kimberley Ann
  2. Measuring Tax Efficiency: A Tax Optimality Index By Raimondos-Møller, Pascalis; Woodland, Alan D
  3. Time Consistent Public Expenditures By Klein, Paul; Krusell, Per; Ríos-Rull, José-Víctor
  4. Vertical versus Horizontal Tax Externalities: An Empirical Test By Brülhart, Marius; Jametti, Mario
  5. On the Optimal Timing of Taxes By Hassler, John; Krusell, Per; Storesletten, Kjetil; Zilibotti, Fabrizio
  6. Pension systems and intragenerational redistribution when labor supply is endogenous By Alessandro, SOMMACAL
  7. Tax Progression in Imperfect Labour Markets : A Survey By Mathias, HUNGERBUEHLER
  8. Social Security, Retirement and Wealth: Theory and Implications By Miles S. Kimball; Matthew D. Shapiro
  9. Structural Reform of Social Security By Martin Feldstein
  10. Social Security Privatization with Elastic Labor Supply and Second-Best Taxes By Kent Smetters
  11. House ownership and taxes By Torfinn Harding, Haakon O. Aa. Solheim og Andreas Benedictow
  12. Assessing Tax Systems Using a Benchmarking Methodology By Mark Gallagher

  1. By: Perroni, Carlo; Scharf, Kimberley Ann
    Abstract: Taxation is only sustainable if the general public complies with it. This observation is uncontroversial with tax practitioners but has been ignored by the public finance tradition, which has interpreted tax constitutions as binding contracts by which the power to tax is irretrievably conferred by individuals to government, which can then levy any tax it chooses. In the absence of an outside party enforcing contracts between members of a group, however, no arrangement within groups can be considered to be a binding contract, and therefore the power to tax must be sanctioned by individuals on an ongoing basis. In this Paper we offer, for the first time, a theoretical analysis of this fundamental compliance problem associated with taxation, obtaining predictions that in some cases point to a re-interpretation of the theoretical constructions of the public finance tradition while in others call them into question.
    Keywords: government; public goods; taxation
    JEL: H10 H20 H30 H40
    Date: 2004–01
  2. By: Raimondos-Møller, Pascalis; Woodland, Alan D
    Abstract: This Paper introduces an index of tax optimality that measures the distance of some current tax structure from the optimal tax structure in the presence of public goods. In doing so, we derive a [0; 1] number that reveals immediately how far the current tax configuration is from the optimal one and, thereby, the degree of efficiency of a tax system. We call this number the Tax Optimality Index. We show how the basic method can be altered in order to derive a revenue equivalent uniform tax, which measures the size of the public sector. A numerical example is used to illustrate the method developed.
    Keywords: distance function; excess burden; tax optimality index
    JEL: H21 H41
    Date: 2004–08
  3. By: Klein, Paul; Krusell, Per; Ríos-Rull, José-Víctor
    Abstract: How should aggregate public expenditures be traded off against their financing costs? We incorporate public expenditures into a standard neoclassical growth setup with model policy choice as made by a government choosing tax rates and spending so that the resulting competitive equilibrium allocation maximizes consumer welfare. An additional key restriction that the government faces in our model is that it cannot commit to future policy. This restriction binds: current income taxes influence past savings decisions as well as past work decisions, and these effects are ignored by governments without access to commitment. We solve for equilibria where ‘reputational’ mechanisms are not operative: we characterize Markov-perfect equilibria of the dynamic game between successive governments. We characterize equilibria in terms of an intertemporal first-order condition (a ‘generalized Euler equation’, GEE) for the government and we use this condition both to gain insight into the nature of the equilibrium and as a basis for computation. The GEE reveals how the government optimally trades off tax wedges over time. For a calibrated economy, we find that when the tax base available to the government is capital income – an inelastic source of funds at any moment in time – the government still refrains from taxing at confiscatory rates. As a result, the economy is far from the mix of public and private goods that would be optimal in a static context; in return, steady-state savings are less distorted.
    Keywords: Markov-perfect equilibrium; optimal taxation; time-consistency
    JEL: E62 H21
    Date: 2004–08
  4. By: Brülhart, Marius; Jametti, Mario
    Abstract: We study taxation externalities in federations of benevolent governments. Where different hierarchical government levels tax the same base, one can observe two types of externalities: a horizontal externality, working among governments of the same level and leading to tax rates that are too low compared to the social optimum; and a vertical externality, working between different levels of government and leading to sub-optimally high tax rates. Building on the model of Keen and Kotsogiannis (2002), we derive a discriminating hypothesis to distinguish vertical and horizontal tax externalities based on observable variables. This test is applied to a panel dataset on local taxes in a sample of Swiss municipalities that feature direct-democratic fiscal decision making, so as to maximize the correspondence with the benevolent.governments of the theory. We find that vertical externalities dominate - they are thus an observed empirical phenomenon as well as a notable extension to the theory of tax competition.
    Keywords: fiscal federalism; horizontal externalities; Swiss tax system; tax competition; vertical externalities
    JEL: H10 H21 H25
    Date: 2004–09
  5. By: Hassler, John; Krusell, Per; Storesletten, Kjetil; Zilibotti, Fabrizio
    Abstract: This Paper analyses the optimal timing of taxes on capital income. We show that the celebrated result that taxes should front-loaded with an initially high tax followed by a discrete jump to the steady state is knife-edge, hinging on capital having a constant depreciation rate. An empirically supported deviation from this case, involving depreciation rates that increase over the lifespan of the investment, implies that optimal taxes should oscillate. Furthermore, the optimality of fluctuating tax rates hinges on the government being able to commit to the path of future tax rates. Without commitment, optimal taxes may be smooth also under accelerating depreciation. In a calibrated example, we find that optimal taxes are oscillating under commitment and smooth without commitment.
    Keywords: capital depreciation; optimal taxation; tax dynamics; time-consistency
    JEL: D90 E61 H21 H30
    Date: 2004–11
  6. By: Alessandro, SOMMACAL (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: It is usually thought that a Beveridgean pension system redistributes income more than a Bismarckian one, since it ensures replacement ratios that decrease with income. We check the validity of this result when the fact that pension systems can redistribute also through their effects on labor income is taken into account. Labor market institutions turn out to be crucial. First we study an economy with a competitive labor market : quite surprisingly, inequality is unaffected by a reallocation of funds towards the Beveridgean system. Then we introduce a minimum wage that creates unemployment on the unskilled labor market : in this case the Beveridgean system is proved to reduce inequality.
    Keywords: Social Security; Intragenerational redistribution; Basic Pension; Beveridgean pension system; Bismarckian pension system
    JEL: H55
    Date: 2004–03–24
  7. By: Mathias, HUNGERBUEHLER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and ERMES, Université Paris II)
    Abstract: We look at the effect of tax progression in imperfect labour markets. The models considered are union models, an equilibrium search model with wage bargaining, an equilibrium search model with wage posting by firms and efficiency wage models. We find that in all basic models, an increase in tax progression leads to lower wages and higher employment. Extensions of the models can however change these results.
    Keywords: Tax progression; Redistribution; Labour Market Imperfections
    JEL: H42 J41 J42 J51
    Date: 2004–10–17
  8. By: Miles S. Kimball (University of Michigan); Matthew D. Shapiro (University of Michigan)
    Abstract: The effect of Social Security rules on the age people choose to retire can be critical in evaluating proposed changes to those rules. This research derives a theory of retirement that views retirement as a special type of labor supply decision. This decision is driven by wealth and substitution effects on labor supply, interacting with a fixed cost of working that makes low hours of work unattractive. The theory is tractable analytically, and therefore well-suited for analyzing proposals that affect Social Security. This research examines how retirement age varies with generosity of Social Security benefits. A ten-percent reduction in the value of benefits would lead individuals to postpone retirement by between one-tenth and one-half a year. Individuals who are relatively buffered from the change—because they are wealthier or because they are younger and therefore can more easily increase saving to offset the cut in benefits— will have smaller changes in their retirement ages. Authors’ Acknowledgements This work was supported by a grant from the Social Security Administration through the Michigan Retirement Research Center (Grant #10-P-98358-5). The opinions and conclusions are solely those of the authors and should not be considered as representing the opinions or policy of the Social Security Administration or any agency of the Federal Government. The authors gratefully acknowledge this support.
    Date: 2003–06
  9. By: Martin Feldstein
    Abstract: Governments around the world have enacted or are currently considering fundamental structural reforms of their Social Security pension programs. The key feature in these reforms is a shift from a pure pay-as-you-go tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts. This paper discusses how such a mixed system could work in practice and how the transition to such a change could be achieved. It then analyzes the economic gains that would result from shifting to a mixed system. I turn next to the three problems that critics raise about any investment-based plan: administrative costs, risk, and income distribution. Finally, I comment on some of the ad hoc proposals for dealing with the financial problem of Social Security without shifting to an investment-based system.
    JEL: H0 H3 H1
    Date: 2005–02
  10. By: Kent Smetters
    Abstract: This paper shows that many common methods of privatizing social security fail to reduce labor market distortions when taxes are second best, challenging a key reason to privatize. Ironically, providing "transition relief" to workers alive at the time of the reform, in an effort to protect their previous contributions, undercuts potential efficiency gains. Chile's reform -- the first major privatization that also served as a model for other countries -- actually increased labor market distortions. It is then shown that privatization with limited transition relief can reduce labor market distortions and produce gains to current and future generations without hurting initial retirees, i.e., a Pareto gain, even with second-best taxes.
    JEL: H0 H2
    Date: 2005–02
  11. By: Torfinn Harding, Haakon O. Aa. Solheim og Andreas Benedictow (Statistics Norway)
    Abstract: The household portfolio is dominated by a small number of assets; primarily housing and mortgages. We compare data on actual portfolios of Norwegian households with estimated optimal portfolios, using traditional financial theory. We find actual portfolios to be close to the portfolio indicated by a mean-variance frontier, based on four assets and estimated under assumptions of short sale constraints. This result is sustained even in a no-tax regime. To induce a substantial change from housing to equity, taxation of the consumption stream from housing is needed. An alternative; taxation of capital gains from housing investment; could actually increase the relative holding of housing.
    Keywords: Households; portfolio choice; consumption tax; capital gains tax.
    JEL: G11 H2 H31
    Date: 2004–11
  12. By: Mark Gallagher
    Abstract: International institutions, such as the World Bank, the International Monetary Fund, and the U.S. Agency for International Development, have been assessing tax system performance and capabilities for decades without having a solid international comparator basis for undertaking these assessments. This paper provides a series of indicators and benchmarks that can help to put such assessments into an international perspective, set specific targets for performance, reform, and modernization, and monitor progress over time.
    Date: 2004–04

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