nep-pub New Economics Papers
on Public Finance
Issue of 2005‒06‒14
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Human Capital and Optimal Positive Taxation of Capital Income By Bovenberg, A Lans; Jacobs, Bas
  2. The taxation of equity, dividends, and stock prices By Richard W. Kopcke
  3. Does More Progressive Tax Make Tax Discipline Weaker? By Tatiana Damjanovic
  4. Inequality, Social Discounting and Estate Taxation By Emmanuel Farhi; Ivan Werning
  5. On the Possibility of Pareto-improving Pension Reform By Tatiana Damjanovic

  1. By: Bovenberg, A Lans; Jacobs, Bas
    Abstract: This paper analyzes optimal linear taxes on capital and labour incomes in a life-cycle model of human capital investment, financial savings, and labour supply with heterogenous individuals. A dual income tax with a positive marginal tax rate on not only labour income but also capital income is optimal. The positive tax on capital income serves to alleviate the distortions of the labour tax on human capital accumulation. The optimal marginal tax rate on capital income is lower than that on labour income if savings are elastic compared to investment in human capital; substitution between inputs in human capital formation is difficult; and most investments in human capital are verifiable. Numerical calculations suggest that the optimal marginal tax rate on capital income is close to the tax rate on labour income.
    Keywords: capital income taxation; education subsidies; human capital; labour income taxation; life cycle
    JEL: H2 H5 I2 J2
    Date: 2005–05
  2. By: Richard W. Kopcke
    Abstract: The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) essentially halved the tax rate on dividends and reduced the top tax rate on capital gains. This paper explores the likely effect of JGTRRA on the composition of returns on corporations’ common stock. Both larger corporations’ past behavior and theory suggest that the recent tax cuts are not likely to increase dividend payouts significantly. Instead, in the short run, dividends will continue to rise in the customary way in response to the recovery in earnings. In the longer run, the tax cuts will principally reduce companies’ cost of capital, fostering capital deepening, when the economy is at full employment. With constant returns to scale prevailing at full employment, capital deepening reduces corporations’ average gross return on assets and equity. Because the tax cuts increase the value of each dollar of earnings for shareholders, they could raise price-earnings ratios by more than 10 percent and stock prices by more than 6 percent. By fostering capital deepening, the tax cuts also tend to increase the real compensation of labor at full employment.
    Keywords: Taxation ; Dividends ; Stock - Prices
    Date: 2005
  3. By: Tatiana Damjanovic
    Abstract: This paper investigates the relationship between the disparity in tax base and tax collection. I address the tax collection problem with traditional industrial organization approach. Thus, I model the "tax minimization" industry where the supplier helps taxpayers to avoid their tax liability. I find that lower income inequality as well as a less progressive tax code may result in a smaller number of tax payers committing to their tax duties. Finally, I question the reduction in the highest tax rate as a policy directed at the improvement of tax discipline.
    Keywords: Endogenous prices, tax collection, inequality, tax progressivity.
    JEL: H21 H23 H26
  4. By: Emmanuel Farhi; Ivan Werning
    Abstract: To what degree should societies allow inequality to be inherited? What role should estate taxation play in shaping the intergenerational transmission of welfare? We explore these questions by modeling altruistically-linked individuals who experience privately observed taste or productivity shocks. Our positive economy is identical to models with infinite-lived individuals where efficiency requires immiseration: inequality grows without bound and everyone's consumption converges to zero. However, under an intergenerational interpretation, previous work only characterizes a particular set of Pareto-efficient allocations: those that value only the initial generation's welfare. We study other efficient allocations where the social welfare criterion values future generations directly, placing a positive weight on their welfare so that the effective social discount rate is lower than the private one. For any such difference in social and private discounting we find that consumption exhibits mean-reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, where no one is trapped at misery. The optimal allocation can then be implemented by a combination of income and estate taxation. We find that the optimal estate tax is progressive: fortunate parents face higher average marginal tax rates on their bequests.
    JEL: C61 D30 D63 H21
    Date: 2005–06
  5. By: Tatiana Damjanovic
    Abstract: The aim of this paper is two-fold. First, it provides a simple framework for the analyses of the transitions between two steady states with different fiscal policies. This allows us to clarify the existing results on the possibility of Pareto-improving transitions from pay-as-you-go to fully funded pension systems. We show that the reduction in the marginal tax rate is a sufficient condition for the possibility of such pension reforms. Second, the paper investigates the features and the duration of the shortest Pareto-improving pension reform in an open economy.
    Keywords: Pension reform, Pareto-improving transition, the shortest transition.
    JEL: H21 H55 E62

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.