nep-pub New Economics Papers
on Public Finance
Issue of 2007‒03‒10
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Non-Linear Income Tax when Highly Skilled Individuals Vote with their Feet By Laurent Simula; Alain Trannoy
  2. A Contribution to the Theory of Optimal Utilitarian Income Taxation By Martin Hellwig
  3. Taxation without Commitment By Reis, Catarina
  4. Harmonization of Corporate Tax Systems and its Effect on Collusive Behavior By Schindler, Dirk; Schjelderup, Guttorm
  5. Corporate Taxes in the World Economy: Reforming the Taxation of Cross-Border Income By Harry Grubert; Rosanne Altshuler
  6. Stock market participation, portfolio choice and pensions over the life-cycle By Steffan Ball
  7. Intertemporal Labor Supply Effects of Tax Reforms By Peter Haan
  8. The Impact of Tax Credits on Labour Supply By Ghazala Azmat
  9. Public Action for Public Goods By Banerjee, Abhijit; Iyer, Lakshmi; Somanathan, Rohini

  1. By: Laurent Simula; Alain Trannoy
    Abstract: This paper examines how allowing individuals to emigrate to pay lower taxes changes the optimal non-linear income tax scheme in a Mirrleesian economy. Type-dependent participation constraints are borrowed from contract theory. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three social criteria are distinguished according to the agents whose welfare matters. Mobility significantly alters the closed-economy results qualitatively, but also quantitatively as veri.ed by simulations. A curse of the middle-skilled occurs in the first-best. In the second-best, the middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Moreover, preventing emigration of the highly-skilled is not necessarily optimal.
    Keywords: Optimal Taxation, Income Tax, Emigration, Participation Constraints
    JEL: H21 H31 D82 F22
    Date: 2006–10
  2. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The paper provides a new formulation of the Mirrlees-Seade theorem on the positivity of the optimal marginal income tax, under weaker assumptions and in a more general model. The formulation of the theorem is independent of whether the model involves finitely many types or a continuous type distribution. The formal argument makes the underlying logic transparent, relating the mathematics to the economics and showing precisely how each assumption enters the analysis.
    Keywords: Optimal Income Taxation, Utilitarian Welfare Maximization, Redistribution
    JEL: D63 H21
    Date: 2007–02
  3. By: Reis, Catarina
    Abstract: This paper considers a Ramsey model of linear capital and labor income taxation in which a benevolent government cannot commit ex-ante to a sequence of taxes for the future. In this setup, if the government is allowed to borrow and lend to the consumers, the optimal capital income tax is zero in the long run. This result stands in marked contrast with the recent literature on optimal taxation without commitment, which imposes budget balance and typically finds that the optimal capital income tax does not converge to zero. Since it is efficient to backload incentives, breaking budget balance allows the government to generate surplus that reduces its debt or increases its assets over time until the lack of commitment is no longer binding and the economy is back in the full commitment solution. Therefore, while the lack of commitment does not change the optimal capital tax in the long run, it may impose an upper bound on the level of long run debt.
    Keywords: Fiscal Policy; Optimal Taxation; Incidence; Debt
    JEL: H22 E62 H62 H21
    Date: 2006–12
  4. By: Schindler, Dirk (Meteorological Institute, University of Freiburg); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We study how harmonization of corporate tax systems affects the stability of international cartels. We show that tax base harmonization reinforces collusive agreements, while harmonization of corporate tax rates may destabilize or stabilize cartels. We also find that bilateral and full harmonization to a common standard is worse from society’s point of view than unilateral harmonization to a minimum tax standard.
    Keywords: Corporate tax systems; tacit collusion
    JEL: H87 L10
    Date: 2007–03–01
  5. By: Harry Grubert (U.S. Treasury Department, Office of Tax Analysis); Rosanne Altshuler (Rutgers University, Department of Economics)
    Abstract: Proposals for the reform of the taxation of cross-border income are evaluated within the general context of the corporate tax in an open economy. We focus on the various behavioral decisions that can be affected such as the location of income and its repatriation. The two income tax proposals considered are: (1) dividend exemption and (2) burden neutral worldwide taxation in which all foreign subsidiary income is included currently in the U.S. worldwide tax base, and at the same time the corporate tax rate is lowered and overhead allocations to foreign income are eliminated so as to keep the overall U.S. tax burden on foreign income the same. We also consider the attractiveness of destination-based and origin-based consumption taxes. Our evaluation of reform options makes use of the best available information. We also present new information on the burden of the current system. However, there are many important unknown behavioral parameters required to judge international tax systems and this missing information, some of which may ultimately be unknowable, makes it difficult to make definitive recommendations. The burden neutral worldwide option seems to offer greater efficiency gains among the two income tax options, particularly because of reduced incentives for income shifting which wastes resources and distorts effective tax rates on investment. To be sure, the burden neutral worldwide option would increase effective tax rates on investment in low-tax countries while not increasing the average U.S. tax rate on foreign source income. The option requires a substantial reduction in the U.S. corporate tax rate. We suggest that increased capital mobility makes changing the mix of corporate and personal level taxation of business income appropriate even apart from the special issues of cross-border taxation such as repatriation taxes and income shifting opportunities that are the main subject of the paper.
    Keywords: international taxation, multinational corporations, tax reform
    JEL: H20 H25 H87
    Date: 2007–03–01
  6. By: Steffan Ball
    Abstract: In this paper we present a calibrated life-cycle model which is able to simultaneously match asset allocations and stock market participation profiles over the life-cycle. The inclusion of per period fixed costs and a public pension scheme eradicates the need to assume heterogeneity in preferences, or implausible parameter values, in order to explain observed patterns. We find a per period fixed cost of less than two percent of the permanent component of annual labour income can explain the limited stock market participation. More generous public pensions are seen to crowd out private savings and significantly reduce the estimates of these fixed costs. This is the first time that concurrent matching of participation and shares has been achieved within the standard preference framework.
    Keywords: precautionary saving, portfolio choice, stock market participation and uninsurable labour income risk
    JEL: G11 H31
    Date: 2007–03
  7. By: Peter Haan
    Abstract: In the year 2000, the German government passed the most ambitious tax reform in post-war German history aiming at a significant tax relief for households. One central aim of this tax reform was to improve work incentives and, thereby, foster employment. In this paper, I estimate an intertemporal discrete choice model of female labor supply that allows to analyze the behavioral effects of the tax reform on the labor supply of married and cohabiting women over time. Using the Markov chain property, I analyze the dynamics of labor supply behavior and derive the short- and long-run labor supply effects of the tax reform.
    Keywords: Intertemporal labor supply of married women, tax reform, Panel data, microsimulation
    JEL: C33 H24 H31 J22
    Date: 2007
  8. By: Ghazala Azmat
    Abstract: One of the principle aims of the Working Families' Tax Credit in the UK was to increase the participation of those with low labour market attachment. The literature to date concludes that for lone mothers there was approximately a 5% point increase in employment. The differences-in-differences methodology that is typically used compare lone mother with single women without children. However, the characteristics of these groups are both observably and unobservably different, such that the identifying assumption may not be satisfied. We find that when we control for differential trends between people with and without children, the employment effect of Working Families' Tax Credit falls significantly. Moreover, by looking at movements in the hour's distribution, it is clear that any Working Families' Tax Credit effect is solely borne on those working full-time (30 hours or more). Another concern is that we find that the policy did not induce people into the labour market from inactivity.
    Keywords: Tax Credits, Di¤erences-in-di¤erences, Lone Mothers
    JEL: H24 I38 C14 J22
    Date: 2006–10
  9. By: Banerjee, Abhijit; Iyer, Lakshmi; Somanathan, Rohini
    Abstract: This paper focuses on the relationship between public action and access to public goods. It begins by developing a simple model of collective action which is intended to capture the various mechanisms that are discussed in the theoretical literature on collective action. We argue that several of these intuitive theoretical arguments rely on special additional assumptions that are often not made clear. We then review the empirical work based on the predictions of these models of collective action. While the available evidence is generally consistent with these theories, there is a dearth of quality evidence. Moreover, a large part of the variation in access to public goods seems to have nothing to do with the “bottom-up” forces highlighted in these models and instead reflect more “top-down” interventions. We conclude with a discussion of some of the historical evidence on top-down interventions.
    Keywords: collective action; public goods
    JEL: H41
    Date: 2007–03

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