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on Public Finance |
| By: | Laurence J. Kotlikoff; David Rapson |
| Abstract: | This paper compares marginal and average tax rates on working and saving under our current federal tax system with those that would arise under a federal retail sales tax, specifically the FairTax. The FairTax would replace the personal income, corporate income, payroll, and estate and gift taxes with a 23 percent effective retail sales tax plus a progressive rebate. The 23 percent rate generates more revenue than the taxes it replaces, but the rebate’s cost necessitates scaling back non-Social Security expenditures to their 2000 share of GDP. The FairTax’s effective marginal tax on labor supply is 23 percent. Its effective marginal tax on saving is zero. In contrast, for the stylized working households considered here, current effective marginal labor taxes are higher or much higher than 23 percent. Take our stylized 45 year-old, married couple earning $35,000 per year with two children. Given their federal tax bracket, the claw-back of the Earned Income Tax Credit, and the FICA tax, their marginal tax is 47.6 percent. The FairTax imposes a zero marginal tax on saving meaning that reducing this year’s consumption by a dollar permits one to increase the present value of future consumption by a dollar. In contrast, the existing federal tax system imposes very high marginal taxes on future consumption. For our stylized working households foregoing a dollar’s consumption this year to uniformly raise consumption in all future years raises the present value of future consumption by only 45.8 to 77.4 cents, i.e., the effective marginal tax rates on uniformly raising future consumption via saving facing our households ranges from 22.6 percent to 54.2 percent. The FairTax also reduces most of our stylized households’ remaining average lifetime tax rates and, often, by a lot. Consider our stylized 30 year-old, single household earning $50,000. The household’s average remaining lifetime tax rate under the current system is 21.1 percent. It’s 16.2 percent under the FairTax. |
| JEL: | H2 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11831&r=pub |
| By: | Correia, Maria Isabel Horta |
| Abstract: | It is relatively well known that the introduction of consumption taxation as an alternative in the tax code, and as the main source of government revenues, leads to a more efficient tax system. However the conventional wisdom is that the change from the actual tax code, based on taxation of capital and labour income to this consumption-based system, has undesirable distributional consequences. In this work a very simple method is developed to argue that the converse is the most reasonable outcome from that fundamental tax reform. The main difference in relation to the literature comes from the assumed source of household heterogeneity. Additionally it is shown that the inclusion of a tax on consumption allows for redistributive policies with no costs in terms of efficiency. |
| Keywords: | consumption taxes; equity; fundamental tax reform; heterogeneous agents |
| JEL: | D63 E62 H20 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5280&r=pub |
| By: | Marc Fleurbaey (CATT, IDEP, University of Pau) |
| Abstract: | In a model where agents have unequal skills and heterogeneous preferences about consumption goods and leisure, this paper studies how to combine linear commodity taxes and non-linear income tax. It proposes a particular social welfare function on the basis of fairness principles. It then derives a simple criterion for evaluating the social welfare consequences of various tax schedules. Under the proposed approach, the optimal tax should have no commodity tax for some range of consumptions, and income redistribution would feature high subsidies to the working poor. It is also shown that, even when the income tax fails to be optimal, commodity taxes may not improve social welfare. |
| Keywords: | optimal tax, income tax, commodity tax, social choice, fairness. |
| JEL: | D63 H21 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:iep:wpidep:0205&r=pub |
| By: | Roland Hodler; Kurt Schmidheiny |
| Abstract: | We study the tension between fiscal decentralization and progressive taxation. We present a multi-community model in which households differ in incomes and housing preferences and in which the local income tax rate is a function of an exogenous progressive tax schedule and an endogenous local tax shifter. The progressivity of the tax schedule induces a self-sorting process that results in substantial though imperfect income sorting. The actual tax structure is thus less progressive than the exogenous tax schedule. Empirical evidence from the largest Swiss metropolitan area supports the predictions of our model. |
| Keywords: | progressive taxation, fiscal decentralization, income segregation |
| JEL: | H73 R23 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1575&r=pub |
| By: | Johannes Becker; Clemens Fuest |
| Abstract: | The standard tax theory result that investment should not be distorted is based on the assumption that profits are locally bound. In this paper we analyze the optimal tax policy when firms are internationally mobile. We show that the optimal policy response to increasing firm mobility may be taxation, subsidization or non-distortion of investment depending on whether the mobile firms are more or less profitable than the average firm in the economy. Our findings may contribute to understanding recent tax policy developments in many OECD countries. |
| Keywords: | corporate taxes, optimal tax policy |
| JEL: | H21 H25 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1592&r=pub |
| By: | Alberto Alesina; Guido Tabellini |
| Abstract: | Many countries, especially developing ones, follow procyclical fiscal policies, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the "starving the Leviathan" classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success. |
| JEL: | H30 H60 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1556&r=pub |
| By: | Pedro H. Albuquerque (Texas A&M International University) |
| Abstract: | This paper uses a dynamic general equilibrium model to study the economic effects of bank account debits (BAD) taxation. Australia and various Latin American countries have levied or levy BAD taxes. Aspects such as financial disintermediation, market illiquidity, and impacts on dividend and interest rates are considered. Part of the BAD tax revenue may be fictitious, due to increased interest payments on government debt. The Brazilian BAD tax (CPMF) experience is evaluated. The empirical analysis confirms some theoretical predictions. Incidence base over GDP appears to be sensitive to the tax rate, possibly engendering a Laffer curve. The tax may also cause real interest rates to increase. Furthermore, the deadweight losses are relatively large, even if revenues are small. The theoretical and empirical results suggest that the BAD tax is not adequate for revenue collection. |
| Keywords: | Bank Account Debits Tax, BAD Tax, Financial Transactions Tax, FTT, Currency Transaction Tax, CTT, Automated Payment Transaction Tax, APT Tax, CPMF, Disintermediation, Illiquidity |
| JEL: | H20 E62 |
| Date: | 2005–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwppe:0511019&r=pub |
| By: | J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta |
| Abstract: | We provide a long-term perspective on the individual retirement behaviour and on the future of retirement. In a Markovian political economic theoretical framework, in which incentives to retire early are embedded, we derive a political equilibrium with positive social security contribution rates and early retirement. Aging has two opposite effects: it leads to lower taxes and fewer (early) retirees, while a poorer median voter will push for higher contributions. The model highlights the existence of crucial income effects: a decrease of the income of young people will induce them to postpone retirement and to vote for less social security. |
| Keywords: | pensions, income effect, tax burden, politico-economic Markovian equilibrium |
| JEL: | D72 H53 H55 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1571&r=pub |
| By: | Johannes Binswanger |
| Abstract: | This paper studies pension design from a risk management point of view using a lexicographic loss aversion model. Interest in this model stems from the fact that it explains income expansion paths of equity and total savings particularly well. I find that all income groups are likely to benefit from a PAYGO system, even in the absence of any redistribution. Optimal equity investments are close to zero for the two bottom income quintiles and increase sharply for higher incomes. The results are compared to optimal pension plans under HARA preferences. I find that a PAYGO system has higher value under loss aversion than in the HARA case. Moreover, equity shares correspond more closely to empirical observations. |
| Keywords: | pension system, portfolio choice, income heterogeneity, loss aversion, HARA preferences |
| JEL: | H55 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1572&r=pub |
| By: | Torben Andersen |
| Abstract: | Many countries face the problem of how to reform social security systems to cope with increasing life expectancy. This raises questions concerning both distribution and risk sharing across generations. These issues are addressed within an OLG model with stochastic life expectancy across generations and endogenous retirement decisions. The social optimum is shown to imply that retirement age should be proportional to longevity. Moreover, increasing longevity calls for pre-funding even if the utility of all generations is weighted equal to the objective discount rate. The social optimum cannot be decentralized due to a conflict between incentives and risk sharing. The implications of stylized social security systems for risk sharing and retirement incentives are analyzed. |
| JEL: | H55 J11 J14 J18 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1577&r=pub |