nep-pub New Economics Papers
on Public Finance
Issue of 2007‒08‒14
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. THE EXCESS BURDEN OF GOVERNMENT INDECISION By Francisco J. Gomes; Laurence J. Kotlikoff; Luis M. Viceira
  2. Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply By Ugo Colombino; Rolf Aaberge
  3. Welfare Effects of Distortionary Company Car Taxation By Eva Gutiérrez Puigarnau; Jos van Ommeren
  4. Analysing the Effects of Tax-benefit Reforms on Icome Distribution: A decomposition Approach By Olivier Bargain; Tim Callan
  5. Commodity tax competition and industry location under the destination - and the origin - principle By Kristian, BEHRENS; Johnathan H. HAMILTON; Gianmarco I.P., OTTAVIANO
  6. Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis By Leon Bettendorf; Albert van der Horst; Ruud A. de Mooij

  1. By: Francisco J. Gomes (London Business School and CEPR); Laurence J. Kotlikoff (Boston University and NBER); Luis M. Viceira (Harvard Business School, CEPR and NBER)
    Abstract: Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, it engenders excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as high as 0.6 percent of the agent's economic resources. This is a significant distortion in of itself. It's also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.
    JEL: H2 H21 H55 H6
    Date: 2007–01
  2. By: Ugo Colombino; Rolf Aaberge
    Abstract: The purpose of this paper is to present an exercise where we identify optimal income tax rules under the constraint of fixed tax revenue. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on detailed Norwegian household data for 1994. For any given tax rule, the estimated model can be used to simulate the choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. Differently from what is common in the literature, we do not rely on a priori theoretical optimal taxation results, but instead we identify optimal tax rules – within a class of 6-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. We explore a variety of social welfare functions with differing degree of inequality aversion and also two alternative social welfare principles, namely equality of outcome and equality of opportunity. All the social welfare functions turn out to imply an average tax rate lower than the current 1994 one. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on relatively high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.
    Keywords: Labour supply, optimal taxation, random utility model, microsimulation
    JEL: H21 H31 J22
    Date: 2006–11
  3. By: Eva Gutiérrez Puigarnau (VU University Amsterdam); Jos van Ommeren (VU University Amsterdam, and Frisch Center, Oslo)
    Abstract: In Europe, company cars are offered by employers as fringe benefits to their employees at a lower price than employees pay in the car market, mainly due to favourable taxation of company cars. We analyse the welfare effects of favourable taxation of company cars for the Netherlands. The estimated annual welfare costs of the distortionary taxation of company cars are estimated to be at least €2,000 per company car. For the whole of Europe, these welfare costs are estimated to be at least €40 billion per year.
    Keywords: Company car; car ownership; car value; welfare costs
    JEL: D12 D61 J33 R41 R48
    Date: 2007–08–03
  4. By: Olivier Bargain (University College Dublin (UCD)); Tim Callan (Economic and Social Research Institute (ESRI))
    Abstract: To assess the impact of tax-benefit policy changes on income distribution over time, we suggest a decomposition methodology based on counterfactual simulations. First, it provides an absolute measure of the impact of tax-benefit changes on inequality, which combines changes in policy structure (rules, rates, etc.) and changes in monetary parameters (benefit amounts, tax bands, etc.) against a distributionally-neutral benchmark, i.e., a situation where monetary parameters are nominally adjusted in line with income growth. We apply this measure to analyze the effect of recent policy changes in twelve European countries. Secondly, we focus on France and Ireland to assess the relative role of policy changes compared to changes in pre-tax income (distribution, composition, demographic structure, etc.). We conduct this exercise for a battery of poverty and inequality measures and check the sensitivity of the results to the decomposition order.
    Keywords: tax-benefit policy, inequality, poverty, decomposition, microsimulation
    JEL: H23 H53 I32
    Date: 2007–05
  5. By: Kristian, BEHRENS; Johnathan H. HAMILTON; Gianmarco I.P., OTTAVIANO
    Abstract: We develop a model of commodity tax competition with monopolistically competitive internationally mobile firms, transport costs, and asymmetric country sizes. We investigate the impacts of non-cooperative tax setting, as well as of tax harmonization and changes in the tax principle, in both the short and the long run. The origin principle, when compared to the destination principle, is shown to exacerbate tax competition and to erode tax revenues, yet leads to a more equal spatial distribution of economic activity. This suggests that federations which care about spatial inequality, like the European Union, face a non-trivial- choice for their tax principle that goes beyond the standard considerations of tax revenue redistribution.
    Keywords: commodity tax competitions; origin principle; destination principle; tax harmonization; industry location
    JEL: F12 H22 H87 R12
    Date: 2007–07–30
  6. By: Leon Bettendorf (Erasmus Universiteit Rotterdam, and CPB); Albert van der Horst (CPB Netherlands Bureau for Economic Policy Analysis); Ruud A. de Mooij (Erasmus Universiteit Rotterdam, CPB, Netspar, and CESifo)
    Abstract: This paper analyzes the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rise in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and if equilibrium forces on the labour market are strong. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value-added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers.
    Keywords: Corporate Tax; Structural Unemployment; Applied General Equilibrium; European Union
    JEL: D58 H25 J64
    Date: 2007–07–23

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