nep-pub New Economics Papers
on Public Finance
Issue of 2005‒04‒30
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ By Sören Blomquist; Luca Micheletto
  2. A Case for Taxing Education By Tomer Blumkin; Efraim Sadka
  3. Social Security Privatization with Elastic Labor Supply and Second-Best Taxes By Kent Smetters
  4. Measuring Social Security’s Financial Problems By Jagadeesh Gokhale; Kent Smetters

  1. By: Sören Blomquist; Luca Micheletto
    Abstract: Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and designs policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents.
    Keywords: optimal taxation, behavioral economics, paternalism, merit goods, non-welfarism
    JEL: H21 H23
    Date: 2005
  2. By: Tomer Blumkin; Efraim Sadka
    Abstract: We illustrate a novel informational feature of education, which the government may utilize. Discretionary decisions of individuals to acquire education may serve as an additional signal (to earned labor income) on the underlying unobserved innate earning ability, thereby mitigating the informational constraint faced by the government. We establish a case for taxing education, as a supplement to the labor income tax.
    Keywords: optimal taxation, re-distribution, education, inequality
    JEL: D60 H20
    Date: 2005
  3. By: Kent Smetters (The Wharton School, University of Pennsylvania)
    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 subsequent countries -- actually increased 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.
    Date: 2005–01
  4. By: Jagadeesh Gokhale (The Wharton School, University of Pennsylvania and NBER); Kent Smetters (The Wharton School, University of Pennsylvania)
    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.
    Date: 2005–01

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