nep-pub New Economics Papers
on Public Finance
Issue of 2007‒01‒13
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Dynamics of Optimal Taxation when Human Capital is Endogenous By Marek Kapicka
  2. Redistribution, Taxes, and the Median Voter By Marco Bassetto; Jess Benhabib
  3. Neutral Property Taxation By Richard Arnott
  4. Why Tax Capital? By Yili Chien; Junsang Lee
  5. Public finances in Portugal: a brief longrun view By António Afonso
  6. Debt and the effects of fiscal policy By Carlo Favero and Francesco Giavazzi
  7. The distribution of wealth and redistributive policies By Jess Benhabib; Alberto Bisin
  8. Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending By Mathias Trabandt
  9. Coordinating Federal and Provincial Sales Taxes: Lessons from the Canadian Experience By Richard M. Bird; Jack M. Mintz; Thomas A. Wilson

  1. By: Marek Kapicka (Economics University of California Santa Barbara)
    Abstract: This paper characterizes the dynamics of Pareto efficient income taxes in a dynamic economy with human capital accumulation. I extend the tools and insights developed by Mirrlees (1971) into a dynamic framework. I follow Diamond (1998) by assuming that there are no income effects on labor supply. If the government can freely borrow and save, I show that i) the problem of finding efficient allocation can be decomposed into two relatively simple stages and ii) if agents have access to capital market (with zero tax on capital), the efficient allocations may be in some cases implemented in a competitive equilibrium by using history independent income taxes. I compute the sequence of optimal income taxes that implement the optimum and show that they marginal income taxes tend to decrease over time and that the gains from adjustment of human capital are about 12 times larger than the static gains from labor supply adjustment
    Keywords: Optimal taxation, private information, human capital
    JEL: E6 H21
    Date: 2006–12–03
  2. By: Marco Bassetto (Research Department Federal Reserve Bank of Chicago); 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: Median voter, gorman aggregation, capital income taxes
    JEL: H21 H23
    Date: 2006–12–03
  3. By: Richard Arnott (Boston College)
    Abstract: A major difficulty in implementing land/site value taxation is imputing the land value of builton sites. The literature has focussed on two alternatives. The first, residual site value, measures postdevelopment site value as property value less structure value, measured as depreciated construction costs. Residual site value would be relatively easy to estimate, but residual site value taxation is distortionary, discouraging density. The second, raw site value, measures post-development site value as "what the land would be worth were there no building on the site (though in fact there is)". Raw site value taxation is neutral (does not distort the timing and density of development), but the estimation of raw site value would be complex so that assessment would likely be less fair and more arbitrary, contentious, and prone to abuse. This paper asks the question: Is it not possible to design a property tax system (taxation of predevelopment land value, post-development structure value, and post-development site value at possibly different rates) that employs the administratively simpler residual definition of post-development site value and achieves neutrality? The paper provides an affirmative answer, characterizes the tax rates that achieve neutrality, and briefly discusses issues of practical implementation.
    Date: 2006–06–27
  4. By: Yili Chien; Junsang Lee (UCLA public)
    Abstract: We study optimal capital taxation in a limited commitment environment. Our environment consists of a continuum of households with idiosyncratic labor shocks, who have access to a complete contingent claims market. Financial contracts are not perfectly enforceable; as in Kehoe and Levine (1993), enforcement constraints take the form of endogenous debt limits. This market imperfection drives the endogenous discrepancy between the household and planner discount factors: households face the possibility of being debt constrained in the future, and as a result have a higher discount factor than the planner, who does not face such a constraint. In such an economy, the planner will choose an optimal capital level that is lower than that chosen by households; this di¤erence in the choice of capital motivates imposing a positive capital income tax on households to induce them to invest at the socially optimal amount
    Keywords: Capital Tax, borrowing constraint, enforcement
    JEL: E22 E62
    Date: 2006–12–03
  5. By: António Afonso
    Abstract: This paper provides a succinct overview of long-run developments regarding public finances in Portugal with an emphasis on the spending side. Issues addressed are the excessive deficit experiences of Portugal, the past experience with fiscal consolidations, and labour cost competitiveness. It is fair to stay that public spending control has been a problem in Portugal, and fiscal consolidations in the 1980s and 1990s have been shorttermed and mostly not successful. Additionally, the compensation of general government employees diverged vis-à-vis the EU15 after EU entry.
    Keywords: public finances; Portugal; fiscal consolidations; compensation of employees.
    JEL: E62 E65 H6
  6. By: Carlo Favero and Francesco Giavazzi
    Abstract: Empirical investigations of the effects of fiscal policy shocks share a common weakness: taxes, government spending and interest rates are assumed to respond to various macroeconomic variables but not to the level of the public debt; moreover the impact of fiscal shocks on the dynamics of the debt-to-GDP ratio are not tracked. We analyze the effects of fiscal shocks allowing for a direct response of taxes, government spending and the cost of debt service to the level of the public debt. We show that omitting such a feedback can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular the absence of an effect of fiscal shocks on long-term interest rates—a frequent finding in research based on VAR’s that omit a debt feedback—can be explained by their mis-specification, especially over samples in which the debt dynamics appears to be unstable. Using data for the U.S. economy and the identification assumption proposed by Blanchard and Perotti (2002) we reconsider the effects of fiscal policy shocks correcting for these shortcomings.
  7. By: Jess Benhabib; Alberto Bisin (Department of Economics New York University)
    Abstract: In this paper we study theoretically the dynamics of the distribution of wealth in an Overlapping Generation economy with bequest and various forms of redistributive taxation. We characterize the transitional dynamics of the wealth distribution and as well as the stationary distribution. We show that, in our economy, the stationary wealth distribution is a power law, a Pareto distribution in particular. Wealth is less concentrated (the Gini coefficient is lower) for both higher capital income taxes and estate taxes, but the marginal effect of capital income taxes is much stronger than the effect of estate taxes. Finally, we characterize optimal redistributive taxes with respect to an utilitarian social welfare measure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes.
    Keywords: wealth distribution
    JEL: E6 C6
    Date: 2006–12–03
  8. By: Mathias Trabandt (School of Business and Economics Humboldt University Berlin)
    Abstract: This paper analyzes optimal pre-announced capital and labor income tax reforms under valuable and productive government spending. Our baseline optimal reform reveals that these model ingredients result in a reduction of welfare losses that occur when the reform is announced before its implementation. Further, the mere existence of welfare losses from pre-announcement is due to the ability of the government to initially choose very high capital taxes and negative labor taxes. A government that instead chooses optimal long run taxes from the implementation date onwards generates sizable increases of welfare gains from pre-announcing the reform. We show that 4 years pre-announcement of this reform and the baseline optimal reform deliver similar levels of welfare gains. The underlying tax structure of both reforms, however, appears to be very different
    Keywords: Optimal taxation, pre-announcement, valuable and productive government spending, welfare
    JEL: E0 E6 H0
    Date: 2006–12–03
  9. By: Richard M. Bird; Jack M. Mintz; Thomas A. Wilson (International Tax Program, Rotman School of Management, University of Toronto)
    Abstract: Canada has operated both a federal value-added tax (the GST) and two variants of provincial VATs for the last 15 years. In addition, several provinces have continued to operate retail sales taxes similar to those in most US states. A brief review of experience around the world with 'two-level' sales tax indicates that Canadian experience is the most relevant international experience for the US to consider. We conclude that the Canadian case suggests that the introduction of a federal VAT in the US would not create any great technical problems for eithere the states or business.
    Keywords: sales tax, value-added tax, intergovernmental coordination
    JEL: H77 H71 H25
    Date: 2006–11

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