nep-pub New Economics Papers
on Public Finance
Issue of 2008‒02‒23
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Income Tax Policy and Wage Subsidy By Sheikh Selim
  2. The cutoff policy of taxation when CRRA taxpayers differ in risk aversion coefficients and income: a proof. By Privileggi, Fabio
  3. Will Corporate Tax Consolidation improve Efficiency in the EU ? By Albert van der Horst; Leon Bettendorf; Hugo Rojas-Romagosa
  4. The Private Value of Public Pensions By Konstantin Petrichev; Susan Thorp
  5. A Prize to Give for: An Experiment on Public Good Funding Mechanisms By Luca Corazzini; Marco Faravelli; Luca Stanca
  6. The Important Thing Is not (Always) Winning but Taking Part: Funding Public Goods with Contests By Marco Faravelli
  7. Optimal life cycle investment with pay-as-you-go pension schemes: a portfolio approach By Willem Heeringa

  1. By: Sheikh Selim (Cardiff University, UK)
    Abstract: We show that in an imperfectly competitive economy, if the government cannot use wage subsidy, in a steady state and in the initial period the optimal labour income tax rate is zero. In an imperfectly competitive economy, since investment is primarily triggered by the motive to earn higher profits, over accumulation of capital induces suboptimal level of working hours. We argue that if the government is restricted to subsidize wage, the optimal policy should set zero tax on labour income which will encourage workers to increase working hours back to the optimal level.
    Date: 2008–01
  2. By: Privileggi, Fabio
    Abstract: Under a cutoff policy, taxpayers can either report income as usual and run the risk of being audited, or report a "cutoff" income and hence pay a threshold tax that guarantees not being audited. Whereas the mainstream literature in this field assumes risk neutrality of taxpayers – with some notable exceptions like Chu (1990) and Glen Ueng and Yang (2001) – this paper assumes risk aversion instead: taxpayers have a Constant Relative Risk Aversion (CRRA) utility function and differ in terms of their relative risk aversion coefficient and income. The novel contribution of this work is that, under certain conditions, the cutoff is accepted by taxpayers with intermediate characteristics in terms of income and relative risk aversion. Contrary to the standard result in the literature, a full separation of types (the rich who accept the cutoff versus the poor who refuse it) does not arise. However, our results confirm that the cutoff policy violates equity, as only some taxpayers directly benefit. Nonetheless, the perception of this drawback may in practice be obfuscated because that exclusion does not necessarily affect only the poor.
    Keywords: cutoff, tax evasion, relative risk aversion.
    JEL: H26 D89 K42
    Date: 2007–12
  3. By: Albert van der Horst (CPB, The Hague); Leon Bettendorf (Erasmus University Rotterdam); Hugo Rojas-Romagosa (CPB, The Hague)
    Abstract: The European Commission favours the introduction of a consolidated corporate tax base to overcome the distortions arising from the existing system of separate accounting. The blueprints for consolidation are simulated with the applied general equilibrium model CORTAX. We show that the benefits of a common consolidated tax base are limited due to two weaknesses. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates for MNEs new tax planning possibilities to exploit tax rate differentials in the European Union. In addition, it triggers tax competition as the incentives for member states to attract foreign investment by reducing their tax rates are enforced. The second weakness arises from the unlevel playing field, which is introduced if only part of the firms chooses to participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and accompanied by harmonisation of the tax rate.
    Keywords: corporate tax; consolidation; formula apportionment; European Union; applied general equilibrium model
    JEL: H87 H21 H25 F21
    Date: 2007–09–24
  4. By: Konstantin Petrichev (School of Finance and Economics, University of Technology, Sydney); Susan Thorp (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Individual retirement savings accounts are replacing or supplementing public basic pensions. However at decumulation, replacing the public pension with an equivalent private sector income stream may be costly. We value the Australian basic pension by calculating the wealth needed to generate an equivalent payment stream using commercial annuities or phased withdrawals, but still accounting for investment and longevity risks. At age 65, a retiree needs an accumulation of about 8.5 years earnings to match the public pension in real value and insurance features. Increasing management fees by 1% raises required wealth by about one year's earnings. Delaying retirement by 5 years lowers required wealth by about one half year's earnings. Phased withdrawals have money's worth ratios close to 0.5 suggesting that private replacement costs are high.
    Keywords: social security; longevity risk; phased withdrawal; stochastic present value
    JEL: H55 J14 G11
    Date: 2007–12–01
  5. By: Luca Corazzini; Marco Faravelli; Luca Stanca
    Abstract: This paper investigates fund-raising mechanisms based on a prize as a way to overcome free riding in the private provision of public goods, under the assumptions of income heterogeneity and incomplete information about income levels. We compare experimentally the performance of a lottery, an all-pay auction and a benchmark voluntary contribution mechanism. We find that prize-based mechanisms perform better than voluntary contribution in terms of public good provision after accounting for the cost of the prize. Comparing the prize-based mechanisms, total contributions are significantly higher in the lottery than in the all-pay auction. Focusing on individual income types, the lottery outperforms voluntary contributions and the all-pay auction throughout the income distribution
    Keywords: Auctions; Lotteries; Public Goods; Laboratory Experiments.
    JEL: C91 D44 H41
    Date: 2007–12
  6. By: Marco Faravelli
    Abstract: This paper considers a public good game with heterogeneous endowments and incomplete information affected by extreme free-riding. We overcome this problem through the implementation of a contest in which several prizes may be awarded. We identify a monotone equilibrium, in which the contribution is strictly increasing in the endowment. We prove that it is optimal for the social planner to set the last prize equal to zero, but otherwise total expected contribution is invariant to the prize structure. Finally, we show that private provision via a contest Pareto-dominates public provision and is higher than the total contribution raised through a lottery.
    Keywords: Contests; Public Goods; Prizes.
    JEL: D44 H41
    Date: 2008–01
  7. By: Willem Heeringa
    Abstract: In this paper we show how pay-as-you-go pension schemes impact on the individual.s optimal investment portfolio. Introducing a pay-as-you-go pension scheme implies that human wealth of young generations is transferred to retired generations. As a consequence, individuals will in general invest less conservatively. These portfolio effects gradually disappear at the end of life.
    Keywords: Social security; Risk sharing; Portfolio choice
    JEL: H55 D91 G11
    Date: 2008–02

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