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on Public Finance |
| By: | Sanjit Dhami; Ali al-Nowaihi |
| Abstract: | The predictions of expected utility theory (EUT) applied to tax evasion are flawed on two counts: (i) They are quantitatively in error by huge orders of magnitude. (ii) Higher taxation is predicted to lower evasion, which is at variance with the evidence. An emerging literature in behavioral economics, most notably based on prospect theory (PT), has shown that behavioral economics is much better at explaining tax evasion. We extend this literature to incorporate issues of optimal taxation. As a benchmark for a successful theory, we require that it should explain, jointly, the facts on the tax rate, tax gap and the level of government expenditure. We find that when taxpayers use EUT (respectively, PT) and the optimal tax is derived from a social welfare function that also uses EUT (respectively, PT), then, the calibration results are completely at odds with the facts. However, when taxpayers use PT but the social welfare function uses standard EUT, there is a very close match between the predictions and the facts. This has important implications for context dependent preferences but also for the newly emerging literature on liberalism versus paternalism in behavioral economics. |
| Keywords: | Prospect theory; Expected utility theory; Tax evasion; Optimal taxation; Normative versus positive economics; Context dependent preferences; Liberalism; Paternalism |
| JEL: | D81 H26 K42 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:07/10&r=pub |
| By: | Aronsson, Thomas (Department of Economics, Umeå University) |
| Abstract: | This paper concerns redistribution and public good provision under asymmetric information, which are here ingredients of a policy-problem facing each member state (nation) of an economic federation with decentralized leadership. Each member state is assumed to have its own redistributive policy and pattern of public consumption, whereas the federal level redistributes (ex-post) between the member states. The results show how and why federal ex-post redistribution may modify the use of income taxation and public good provision at the national level, relative to the policy outcome in the absence of a federal government, as well as how the national policy incentives depend on whether or not the federal government uses distortionary taxes. |
| Keywords: | Income taxation; redistribution; public goods; fiscal federalism; decentralized leadership |
| JEL: | D31 D60 D82 H21 |
| Date: | 2007–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0715&r=pub |
| By: | Kyrre Stensnes (Statistics Norway) |
| Abstract: | Any contribution to a pay-as-you-go pension system may be considered mandatory savings to the extent that it gives a claim to a future benefit. Contributors to the economic literature have argued that an increase in this savings component will lower implicit marginal tax rates, thereby reducing distortions in the labour market. However, the efficiency gain created by increasing the actuarial component of pensions may come at the cost of increased inequality in pension benefits. The trade-off between efficiency and equity is not easy to quantify in actual public pension schemes whose benefit functions intrinsically exhibit non-linear characteristics. This paper develops a framework to quantify this trade-off in a fully specified pension system using dynamic micro-simulation modelling. The methodology is then applied to five different pension schemes actually proposed for Norway. The results demonstrate the relevance of this study: The improvement of the equity-efficiency trade-off either does not materialise, as in one case, or is arguably driven by a different factor than advocated by policymakers. |
| Keywords: | Pension reform; social security; equity; labour supply; and efficiency. |
| JEL: | H53 H55 D31 J22 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:515&r=pub |