nep-pub New Economics Papers
on Public Finance
Issue of 2006‒04‒01
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On Policy Relevance of Ramsey Tax Rules By Selim, Sheikh Tareq
  2. Optimal wealth taxes with risky human capital By Borys Grochulski; Tomasz Piskorski
  3. A Dynamic Theory of Public Spending, Taxation and Debt By Marco Battaglini; Stephen Coate
  4. The Effects of Joint Taxation of Married Couples on Labor Supply and Non-wage Income By Sara LaLumia
  5. Redistribution, taxes, and the median voter By Marco Bassetto; Jess Benhabib
  6. Principles of Cost-Benefit Analysis By Robin Boadway
  7. Comparing Tax Rates Using OECD and GTAP 6 Data By Gurgel, Angelo; Metcalf, G.; Reilly, John

  1. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: Over the last three decades, the literature has experienced a marked enthusiasm amongst the critics of optimal taxation theory who attempted to establish the limits of optimal tax formulas and prescriptions in designing tax policy. This paper, in pursuit of investigating the importance and policy relevance of Ramsey tax rules, establishes that most of the common grounds of such criticisms, be it realistic, such as administrative and compliance costs, or be it rather abstract, such as fairness, are either unimportant or irrelevant for Ramsey taxation. The more important inadequacy of the traditional Ramsey tax models is their limited applicability for designing tax policy in developing countries.
    Keywords: Optimal taxation; Ramsey tax rules; Policy relevance
    JEL: E61 E62 H21 H30
    Date: 2006–03
  2. By: Borys Grochulski; Tomasz Piskorski
    Abstract: We study the structure of optimal wealth and labor income taxes in a Mirrlees economy in which the productivity of labor (i.e., skill) is private, stochastic, and endogenous. Individual agents' skills are determined by their level of human capital. Human capital is not publicly observable and the returns to human capital investment are subject to idiosyncratic shocks. Preferences are not assumed to be additively separable in consumption and human capital investment and, thus, the intertemporal marginal rates of substitution of consumption are private information. We characterize the optimal allocation and a tax system that implements this allocation in equilibrium. The optimal allocation does not satisfy the "reciprocal Euler equation" of Rogerson [Econometrica, 1985], which holds in Mirrlees economies with exogenous skills. The tax system we use in our decentralization of the optimum consists of a wealth tax that is linear in wealth and a labor income tax that depends solely on labor income. The result of Kocherlakota [Econometrica, 2005], establishing the optimality of zero expected marginal wealth tax rate, holds in our model. We show that endogenous skill determination affects the volatility of marginal wealth taxes rather than their expectation. Relative to economies with exogenous skills, the optimal marginal wealth tax rate is more volatile in our endogenous skill economy. Also, we demonstrate the optimality of a wedge in the returns on the two assets present in our economy: At the optimum, the marginal return on human capital investment is strictly larger than the marginal return on physical capital investment.
    Keywords: Human capital ; Wealth
    Date: 2005
  3. By: Marco Battaglini; Stephen Coate
    Abstract: This paper presents a dynamic political economy theory of public spending, taxation and debt. Policy choices are made by a legislature consisting of representatives elected by geographically-defined districts. The legislature can raise revenues via a distortionary income tax and by borrowing. These revenues can be used to finance a national public good and district-specific transfers (interpreted as pork-barrel spending). The value of the public good is stochastic, reflecting shocks such as wars or natural disasters. In equilibrium, policy-making cycles between two distinct regimes: “business-as-usual” in which legislators bargain over the allocation of pork, and “responsible-policy-making” in which policies maximize the collective good. Transitions between the two regimes are brought about by shocks in the value of the public good. In the long run, equilibrium tax rates are too high and too volatile, public good provision is too low and debt levels are too high. In some environments, a balanced budget requirement can improve citizen welfare.
    JEL: H6
    Date: 2006–03
  4. By: Sara LaLumia (Department of Economics, University of Michigan; Department of Economics, College of William and Mary)
    Abstract: The United States changed its tax treatment of married couples in 1948, from a system in which each spouse paid taxes on his or her own income to a system in which a married couple is taxed as a unit. The switch from separate to joint taxation changed incentives for labor supply and asset ownership. This paper investigates the effects of the conversion to joint taxation, taking advantage of a natural experiment created by cross-state variation in property laws. Married individuals in states with community property laws had always been taxed as if each spouse had earned half of the coupleÕs income, and thus were unaffected by the 1948 legal change. Comparing the behavior of taxpayers in affected and unaffected states indicates that the tax change is associated with a decline of 0.9-1.6 percentage points in the labor force participation rate of married women, consistent with the higher first-dollar tax rates they faced after 1948. Married women were also 0.6-1.9 percentage points less likely to have non-wage income after 1948, reflecting pre-1948 allocation of family assets to wives for tax purposes. The effects of joint taxation on married menÕs labor force participation and non-wage income holding are generally not statistically significant.
    Keywords: joint taxation, labor supply, income shifting
    JEL: H24 J22
    Date: 2006–03–23
  5. By: Marco Bassetto; Jess Benhabib
    Abstract: We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the “bang- bang” property.
    Keywords: Taxation ; Wealth
    Date: 2006
  6. By: Robin Boadway (Queen's University, Kingston, Canada)
    Abstract: This paper summarizes the procedure for the economic evaluation of government projects and policy reforms. It begins with the social welfare function underpinnings of cost-benefit analysis including the role of distributive weights and the choice of numeraire. It then turns to the conduct of a social cost-benefit analysis using the net present value criterion. This includes the shadow pricing of market products and inputs affected by the project, indirect welfare effects, the opportunity cost of project finance, the evaluation of non-marketed inputs and outputs, and the opportunity cost of risk. Issues involved in selecting a discount rate are discussed, especially those arising from imperfect capital markets. Finally, since many public projects have long-term consequences, the principles that might be used to take account of effects of projects on future generations are outlined. Techniques for accounting for these effects, such as generational accounting, are summarized and its shortcomings highlighted.
    Keywords: cost-benefit, net present value, shadow pricing
    JEL: D61
    Date: 2006–02
  7. By: Gurgel, Angelo; Metcalf, G.; Reilly, John
    Abstract: Research Notes
    Date: 2006

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