nep-pub New Economics Papers
on Public Finance
Issue of 2007‒07‒07
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Why Are Capital Income Taxes So High? By Flodén, Martin
  2. How Tax Progression Affects Effort and Employment By Erkki Koskela; Ronnie Schöb
  3. Causes and Consequences of Tax Morale: An Empirical Investigation By Benno Torgler; Markus Schaffner
  4. Dual Income Taxation as a Stepping Stone Towards a European Corporate Income Tax By Bernd Genser; Dirk Schindler
  5. The Marginal Utility of Income By Richard Layard; Guy Mayraz; Stephen Nickell

  1. By: Flodén, Martin
    Abstract: The Ramsey optimal taxation theory implies that the tax rate on capital income should be zero in the long run. This result holds even if the social planner only cares about workers that do not hold assets, or if the planner only cares about any other group in the economy. This paper demonstrates that although all households agree that capital income taxation should be eliminated in the long run, they do not agree on how to eliminate these taxes. Wealthy households would prefer a reform that is funded by higher taxes on labour income while households with little wealth would prefer a reform that is funded mostly by high taxes on initial wealth. Pareto improving reforms typically exist, but the welfare gains of such reforms are modest.
    Keywords: inequality; optimal taxation; redistribution
    JEL: E60 H21
    Date: 2007–06
  2. By: Erkki Koskela (University of Helsinki and IZA); Ronnie Schöb (Free University of Berlin)
    Abstract: Within an efficiency wage framework, we study the effects of two revenue-neutral tax reforms that change the progressivity of the labour tax system. A revenue-neutral increase in both the wage tax and tax exemption and a revenue-neutral change in the composition of labour taxation towards the tax with the smaller tax base will lead to the same results: they moderate wages, workers’ effort, effective labour input and aggregate output. Whether employment rises or falls, however, depends in both reforms on the magnitude of the prereform total tax wedge. The larger this tax wedge is, the more negative is the impact of reforms on workers’ effort. A larger total tax wedge increases the negative effect of tax progression on labour productivity and thus thwarts the positive employment effect of wage moderation.
    Keywords: efficiency wages, tax progression, structure of labour taxation
    JEL: H22 J41 J48
    Date: 2007–06
  3. By: Benno Torgler; Markus Schaffner
    Abstract: Many taxpayers truthfully declare their income to the tax administration. Why? In this paper we have found a significant correlation between tax morale and tax evasion, controlling a variety of factors. Furthermore we have analysed tax morale as dependent variable and studied the determinants that shape it. The results indicate that factors such as the tax administration, tax system, tax awareness, compliance perceptions, trust in officials and others, and the willingness to obey have a relatively strong impact on tax morale.
    Keywords: tax morale; tax compliance; tax evasion; tax system; tax administration; social capital
    JEL: H26
    Date: 2007–05
  4. By: Bernd Genser (University of Konstanz); Dirk Schindler (University of Konstanz)
    Date: 2007–06–27
  5. By: Richard Layard; Guy Mayraz; Stephen Nickell
    Abstract: In both public economics and welfare analysis it is crucial to know how fast the marginal utility ofincome declines as income increases. One needs this parameter for cost-benefit analysis, for optimaltaxation and for the (Atkinson) measurement of inequality. We estimate this parameter using fourcross-sectional surveys of subjective well-being and two panel surveys. Altogether, we use data fromover 50 countries, and in a period extending from 1972 to 2005. In all six surveys we find aremarkably consistent relationship between reported well-being and income. We estimate theelasticity of marginal utility with respect to income at around (minus) 1.25. Thus, marginal utilitydeclines somewhat faster than in the case (assumed by Dalton and others) when well-being is linear inlog income. In the second part of the paper, however, we ask whether true well-being may not have aconvex relationship to reported well-being, making it less concave with respect to income. We findsome evidence of this, so that the correct elasticity of marginal utility with respect to income isroughly (minus) 1.15. These figures show that Dalton's theoretical assumption was not far from thetruth revealed by empirical evidence, and provide scientific estimates which can be used in allbranches of economics applied to public policy.
    Keywords: Marginal utility, income, life satisfaction, happiness, public economic, welfare, inequality,optimal taxation, reference-dependent preferences
    JEL: I31 H00 D1 D61 H21
    Date: 2007–03

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