nep-pub New Economics Papers
on Public Finance
Issue of 2007‒09‒02
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Capital Income Taxation By Andrew B. Abel
  2. Social security, income taxation and poverty distribution By MALDONADO, Darío
  3. Salience and Taxation: Theory and Evidence By Raj Chetty; Adam Looney; Kory Kroft
  4. An Evaluation of the Working Income Tax Benefit By William Scarth; Lei Tang
  5. Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage? By Pierre Cahuc; Guy Laroque
  6. As SIMPL As That: Introducing a Tax-Benefit Microsimulation Model for Poland By Olivier Bargain; Leszek Morawski; Michal Myck; Mieczyslaw Socha

  1. By: Andrew B. Abel
    Abstract: In an economy with identical infinitely-lived households that obtain utility from leisure as well as consumption, Chamley (1986) and Judd (1985) have shown that the optimal tax system to pay for an exogenous stream of government purchases involves a zero tax rate on capital in the long run, with tax revenue collected by a distortionary tax on labor income. Extending the results of Hall and Jorgenson (1971) to general equilibrium, I show that if purchasers of capital are permitted to deduct capital expenditures from taxable capital income, then a constant tax rate on capital income is non-distortionary. Importantly, even though this specification of the capital income tax imposes a zero effective tax rate on capital, the capital income tax can collect substantial revenue. Provided that government purchases do not exceed gross capital income less gross investment, the optimal tax system will consist of a positive tax rate on capital income and a zero tax rate on labor income--just the opposite of the results of Chamley and Judd.
    JEL: E62 H21
    Date: 2007–08
  2. By: MALDONADO, Darío
    Abstract: In this paper I consider the normative arguments that justify a public social security system as a redistributive device when goverment is concerned with individual utility and poverty. Redistribution can be done using social security, income taxation or both. The main objective of this paper is to show how the consideration of a planner that cares about poverty and utility increases the desirability of social with respect to the case when the planner only cares about utility.
    Date: 2006–01–01
  3. By: Raj Chetty; Adam Looney; Kory Kroft
    Abstract: A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and nearby control stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption significantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience affects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.
    JEL: D11 H0 J0 K34
    Date: 2007–08
  4. By: William Scarth; Lei Tang
    Abstract: The federal government has implemented an earned income tax credit – what it has called the Working Income Tax Benefit – in the 2007 Budget. Edmund Phelps has argued that the earned income tax credit in the United States should be replaced with an employment subsidy. This paper assesses the importance of Phelps’ concern, and related issues, for Canada. This debate is important for two reasons: the plight of those blocked by the "welfare wall" is dire, and the entire community has an interest in lower structural unemployment in an environment that involves an aging population and an accompanying labour shortage.
    Keywords: I38, J38, E25, F41
    Date: 2007–08
  5. By: Pierre Cahuc (University of Paris 1, CREST-INSEE, CEPR and IZA); Guy Laroque (CREST-INSEE and IZA)
    Abstract: We analyze optimal taxation in an economy with monopsonistic labor markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.
    Keywords: minimum wage, optimal taxation, monopsony
    JEL: H31 J30 J42
    Date: 2007–07
  6. By: Olivier Bargain (University College Dublin, CHILD and IZA); Leszek Morawski (University of Warsaw); Michal Myck (DIW Berlin, IFS and IZA); Mieczyslaw Socha (University of Warsaw)
    Abstract: The Polish tax and benefit system is presented in the context of a recently developed microsimulation model, SIMPL. The model allows simulating direct taxes, social contributions and public benefits in Poland for the years 2003 and 2005. It is based on the Household Budgets Survey data (Badania Budzetów Gospodarstw Domowych) from 2003 and 2005. The document describes details of the Polish tax and benefit system and the simulation assumptions which were necessary in modelling it in SIMPL. We provide information on the quality of the data used in the model and some details of the validation process through various robustness checks. Finally we provide examples of application of the model for analysis of effects of policy reforms.
    Keywords: microsimulation, tax and benefit systems, income distribution, Poland
    JEL: H24 H31 I32 I38
    Date: 2007–08

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