nep-pub New Economics Papers
on Public Finance
Issue of 2005‒10‒04
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects By Will Martin; James E. Anderson
  2. Pareto-Improving Bequest Taxation By Volker Grossmann; Panu Poutvaara
  3. Optimum Income Taxation and Layoff Taxes By Cahuc, Pierre; Zylberberg, Andre
  5. Dual Income Taxation: Why and how? By Peter Birch Sørensen

  1. By: Will Martin (World Bank); James E. Anderson (Boston College)
    Abstract: The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify very much lower measures of the marginal welfare cost of taxes and greater public good provision than indicated by traditional, compensated analyses. We confirm that this difference remains substantial with newer elasticity estimates, but show that either compensated or uncompensated measures of the marginal cost of funds can be used to evaluate the costs of taxation– and will provide the same result– as long as the income effects of both taxes and public good provision are incorporated in a consistent manner.
    Keywords: fiscal policy; second best; public goods; distortions; costs of taxation, marginal cost of funds; marginal excess burden, thought experiment.
    JEL: D61 F11 H21 H43
    Date: 2005–09–08
  2. By: Volker Grossmann; Panu Poutvaara
    Abstract: Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children’s education. This result holds even if the wage tax rate is held constant when introducing bequest taxation. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high.
    Keywords: bequest taxation, bequests, education, Pareto improvement
    JEL: D64 H21 H31 I21
    Date: 2005
  3. By: Cahuc, Pierre; Zylberberg, Andre
    Abstract: This paper analyses optimum income taxation in a model with endogenous job destruction that gives rise to unemployment. It is shown that optimal tax schemes comprise both payroll and layoff taxes when the state provides public unemployment insurance and aims at redistributing income. The optimal layoff tax is equal to the social cost of job destruction, which amounts to the discounted value of the sum of unemployment benefits (that the state pays to unemployed workers) and payroll taxes (that the state does not get when workers are unemployed). Our quantitative analysis suggests that the introduction of layoff taxes, that are usually absent from actual tax schemes, could lead to significant increases in employment and GDP.
    Keywords: job destruction; layoff taxes; optimal taxation
    JEL: H21 H32 J38 J65
    Date: 2005–08
  4. By: Dr. B.Mishra (North-Eastern Hill University); Dr. Purusottam Nayak (North-Eastern Hill University)
    Abstract: Demand for increased public expenditure due to enhanced political consciousness and implementation of investment programmes through mechanism(s) infected with diseconomies are the two important forces among several others to put increased pressure on the fiscal resources available within a state. Short-term measures undertaken by a Sate viz., dependence on federal transfers and resorting to overdraft evidently has their respective detrimental implications on fiscal health of the state. The remedial approach pervasively suggested by the contemporary fiscal strategists to tackle the ever-increasing fiscal gap moves towards attaining an appropriate degree of financial self reliance. Thus, the obvious solution of fiscal restructuring dwells on an in-depth understanding of the fiscal system of a state particularly on a temporal analysis of the indicators that throw light on the performance of a tax system in respect of two objectives: (i) siphoning off into the state exchequer the collection of revenue without endangering the incentive for private savings and investment and (ii) helping to release resources for private investment by reducing private consumption. While the indicators like the compound growth rate and marginal tax rates do not take in to account the taxable capacity, the tax ratio and the tax efforts measures generally fail to indicate the responsiveness of the tax structure to changes in state’s income over time. Thus the temporal analysis of tax responsiveness in terms of Elasticity and Buoyancy becomes imperative to have an evaluative insight into the effectiveness of a state’s tax system. The present study is an attempt in this regard by taking the States of North Eastern Region for the period 1963-64 to 2000-01. The study reveals that most of the States in the region have failed miserably in mobilizing resources to meet ever increasing public expenditures and thereby are suffering from dependency syndromes.
    Keywords: Elasticity Buoyancy Tax Productivity
    JEL: D6 D7 H
    Date: 2005–09–29
  5. By: Peter Birch Sørensen
    Abstract: The dual income tax combines a progressive tax schedule for labour income with a low flat tax rate on capital income and corporate income. This paper restates the case for the dual income tax and discusses alternative methods of taxing business income under such a tax system, paying special attention to the taxation of income from closely held corporations. It is argued that the imputed normal return to shares in unlisted companies should be taxed as capital income, while above-normal returns should be subject to labour income tax. The paper demonstrates that such a tax scheme can be designed to be neutral towards the firm’s investment and financing decisions and towards the decisions of shareholders to realize their shares.
    Keywords: dual income tax, tax neutrality, taxation of business income, shareholder income tax
    JEL: H24 H25
    Date: 2005

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.