nep-pub New Economics Papers
on Public Finance
Issue of 2006‒05‒20
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Effect of Taxes on Efficiency and Growth By Martin Feldstein
  2. Can Coasean bargaining justify Pigouvian taxation? By Stephanie Rosenkranz; Patrick W. Schmitz
  3. A Dynamic Theory of Public Spending, Taxation and Debt By Marco Battaglini; Stephen Coate
  4. Fair Tax Evasion By Barth, Erling; Cappelen, Alexander W.; Ognedal, Tone
  5. Tax Competition and Parasitic Tax Havens By Joel Slemrod; John D. Wilson
  6. Tax Law Changes, Income Shifting and Measured Wage Inequality: Evidence from India By Jagadeesh Sivadasan; Joel Slemrod
  7. Optimal social security in a dynastic model with investment externalities and endogenous fertility By Zeng, J; Jie Zhang
  8. Marginal indirect tax reform analysis with merit good arguments and environmental concerns: Norway, 1999 By Fred Schroyen and Jørgen Aasness
  9. Income Taxation, Tuition Subsidies, and Choice of Occupation By Geir Haakon Bjertnæs

  1. By: Martin Feldstein
    Abstract: This nontechnical paper discusses the adverse effects of high marginal tax rates on labor income and on investment income. It explains that the deadweight loss of a tax on labor income depends on the response of taxable income and not just the change in labor supply. An across the board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue and only collects about two-thirds of the revenue implied by a “static” calculation. A tax on investment income brings a deadweight loss even if household saving does not respond to taxes and the net rate of return. What matters is the response of future consumption. The tax on investment income is also effectively a tax on labor supply because current work effort produces income that will be spent on future consumption and the tax on investment income reduces the future consumption that results from more work today. An appendix shows for a simple log utility case that the tax on labor income has a smaller deadweight loss than a tax on investment income with the same present value of revenue. There is a further discussion of the various ways in which capital income taxes distort economic activity.
    JEL: H2
    Date: 2006–05
  2. By: Stephanie Rosenkranz; Patrick W. Schmitz
    Abstract: The fact that according to the celebrated Coase Theorem rational parties always try to exploit all gains from trade is usually taken as an argument against the necessity of government intervention through Pigouvian taxation in order to correct externalities. However, we show that the hold-up problem, which occurs if non-verifiable investments have external effects and parties cannot be prevented from always exploiting ex post gains from trade through Coasean bargaining, may be solved by government intervention. In this sense, the impossibility to rule out Coasean bargaining (after investments are sunk) may in fact justify Pigouvian taxation.
    Keywords: Hold-up problem, Bargaining, Contracts, Taxation, Externalities
    JEL: D62 H21 H23 L14
    Date: 2006–02
  3. By: Marco Battaglini; Stephen Coate
    Date: 2006–05–11
  4. By: Barth, Erling (Insitute for Social Research and Department of Economics, University of Oslo.); Cappelen, Alexander W. (The Norwegian School of Economics and Business Administration.); Ognedal, Tone (Dept. of Economics, University of Oslo)
    Abstract: In this paper we analyse how fairness considerations, in particular considerations of just income distribution, affect whether or not people believe tax evasion can be justified and their willingness to engage in tax evasion. Using data from the Norwegian “Hidden Labour Market Survey” we show that individuals with low wages or long working hours, individuals that are treated unfairly by most tax systems, have a higher probability of justifying tax evasion. The same individuals are also more willing to take home income without reporting it to the tax authorities. These results are consistent with a model in which individuals make a trade-off between economic gains and fairness considerations when they make decisions about tax evasion. Taken together our results suggest that considerations of fair income distribution are important for the analysis of tax evasion.
    Keywords: Tax evasion; redistributive taxation; fair income distribution.
    JEL: D63 H26
    Date: 2006–04–25
  5. By: Joel Slemrod; John D. Wilson
    Abstract: We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries. The havens use real resources to help companies camouflage their home-country tax avoidance, and countries use resources in an attempt to limit the transfer of tax revenues to the havens. The equilibrium price for this service depends on the demand and supply for such protection. Recognizing that taxes on wage income are also evaded, we solve for the equilibrium tax rates on mobile capital and immobile labor, and we demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries, in part because countries would be induced to increase their tax rates, which they have set at inefficiently low levels in an attempt to attract mobile capital. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolishment of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens.
    JEL: H26 H87
    Date: 2006–05
  6. By: Jagadeesh Sivadasan; Joel Slemrod
    Abstract: We use a large dataset covering all registered plants in the manufacturing sector in India over the period 1986 to 1995 to examine the effects of a 1992 income tax law change that eliminated the double taxation of wages paid to partners in partnership firms. This tax law change provides a unique opportunity to identify the effects of tax policy changes on firm behavior in a developing country context. Since the change provided incentives for shifting income from wages to profits, it also has important implications for certain measures of wage inequality. We find an immediate and pervasive response by partnership firms to the tax law change, reflected in a significant shifting of income from profits to managerial wages. Since about 50 percent of registered manufacturing plants are incorporated in the form of partnerships (including most family-run businesses), income shifting by these firms could have a significant impact on measured wage inequality. We find a sizeable jump in the mean and median relative wage of skilled workers (which includes managers and partners) following the tax law change in 1992. This sudden increase in measured wage inequality follows major trade liberalization and deregulation reforms announced earlier (in July 1991). We find that the income shifting induced by the tax law change explains almost all of the observed increase in measured wage inequality following these reforms. This finding is robust to inclusion of controls for a number of other potential sources of post-liberalization increases in wage inequality. Our results show that firms respond strongly to tax incentives for income shifting, and highlight the need to control for the potential effects of tax incentives in studies of wage inequality.
    JEL: H32 H25 F14 O24
    Date: 2006–05
  7. By: Zeng, J; Jie Zhang (MRG - School of Economics, The University of Queensland)
    Abstract: This paper studies optimal pay-as-you-go social security with positive bequests and endogenous fertility. With an investment externality, a competitive solution without social security su?ers from under-investment in capital and over-reproduction of population. We show that social security can improve welfare by reducing fertility and increasing capital intensity. We also illustrate numerically that a small degree of this externality is enough to justify the observed high ratios of social security spending to GDP.
  8. By: Fred Schroyen and Jørgen Aasness (Statistics Norway)
    Abstract: We present a framework to identify and evaluate marginal tax reforms when merit good arguments and environmental concerns are given explicit consideration. It is applied to the Norwegian indirect tax system for 1999. The analysis shows that the reform passed in Parliament in November 2000 had a clear redistributive profile: a lowering of the VAT rate on food items and the introduction of a VAT on services benefits households in the lowest seven deciles while the upper three deciles got worse off. But we also argue that the aggregate demand responses triggered an increase in greenhouse gasses. Next, we show that if the 2000 reform had been complemented with tax rates rate changes on other products, it could have made every decile better off. Finally, we present socially optimal reforms, under different weights on inequality and the environment.
    Keywords: indirect tax reform; merit good arguments; greenhouse gasses
    JEL: H21 H23
    Date: 2006–04
  9. By: Geir Haakon Bjertnæs (Statistics Norway)
    Abstract: Differentiated tax rates on labor and capital income are found to be optimal in this study, where agents choose occupation based on lifetime income net of tuition costs. Efficient revenue raising in a case where the government can not observe educational effort implies that the government should trade off efficiency in production for efficiency in intertemporal consumption. The subsequent wage difference between high and low-skilled occupations is increased compared to a production efficient outcome, which is in contrast to previous results in the literature.
    Keywords: Optimal income taxation; Subsidies for tuition; Skill formation; Production efficiency
    JEL: H21 H24
    Date: 2006–05

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