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on Public Finance |
| By: | Raj Chetty |
| Abstract: | Since Feldstein (1999), the most widely used method of calculating the excess burden of income taxation is to estimate the effect of tax rates on reported taxable income. This paper reevaluates the taxable income elasticity as a measure of excess burden when individuals can evade or avoid taxes. In many cases, part of the cost of evasion and avoidance reflects a transfer to another agent in the economy. I show that in such situations, excess burden depends on a weighted average of the taxable income and total earned income elasticities, with the weight determined by the marginal resource cost of sheltering income from taxation. This generalized formula implies that the efficiency cost of taxing high income individuals is not necessarily large despite evidence that their reported incomes are highly sensitive to tax rates. |
| JEL: | H21 J22 J33 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13844&r=pub |
| By: | Knud J., MUNK |
| Abstract: | Dixit’s 1975 paper ‘Welfare Effects of Tax and Price Changes’ cosntitutes a seminal contribution to the theory of tax reform analysis within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which have led to misinterpretation of some Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted, and shows that this result provides the key to understanding what determines the optimal system of commodity taxation as reflected in the Corlett and Hague analysis of optimal taxation in an economy with two produced commodities. Recasting work by Deaton (1981b), it generalises, using an alternative definition of the complementarity between consumption and leisure, to an economy with many commodities the insight that the optimal tax system is determined as a trade-off between two objectives : 1) to encourage the supply of labour to the market, and 2) to limit the distorsion of the pattern of consumption of produced commoditie. This insight cannot be illustrated by simulation studies using standard additive separable utility functions. However, extending work of Atkinson and Stern (1080,1981) the paper presents a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. This functional form is used to provide a quantitative illustration of the trade-off which defines the optimal tax system and thus desirable directions of tax reform. |
| Keywords: | Public economics, optimal taxation, tax reform, tax simulation, distance functions, CGE models |
| JEL: | H2 |
| Date: | 2008–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008006&r=pub |
| By: | Aronsson, Thomas (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University); Witterblad, Mikael (Department of Economics, Umeå University) |
| Abstract: | This paper concerns optimal income and commodity taxation in a two-type overlapping generations model, where used durable goods are traded in a second-hand market. As second-hand transactions are difficult to observe, we assume that the government is unable to directly control second-hand transactions via commodity taxation. A basic question is how the government in this case may use the second-hand market as a channel for relaxation of the self-selection constraint. We show how the appearance of a second-hand market for used durable goods affects the optimal use of labor income and capital income taxation as well as the optimal use of commodity taxation on new durable goods. |
| Keywords: | Optimal taxation; Intertemporal Choice; Durable Goods |
| JEL: | D91 H21 H23 |
| Date: | 2008–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0732&r=pub |
| By: | Guner, Nezih (Universidad Carlos III, Madrid); Kaygusuz, Remzi (Sabanci University); Ventura, Gustavo (University of Iowa) |
| Abstract: | We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labor supply: while hours per-worker display small increases, total hours and female labor force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labor supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy. |
| Keywords: | taxation, two-earner households, labor force participation |
| JEL: | E62 H31 J12 J22 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3318&r=pub |
| By: | Albert Marcet; Andrew Scott |
| Abstract: | We analyse the implications of optimal taxation for the stochastic behaviour of debt. We show that when a government pursues an optimal fiscal policy under complete markets, the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase. By contrast, under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit. Data for US government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness. |
| Keywords: | Complete vs incomplete markets, Debt Management, Fiscal |
| JEL: | E62 H62 H63 |
| Date: | 2007–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:728.08&r=pub |
| By: | Pinotti, Paolo |
| Abstract: | Financial markets and pay-as-you-go social security are two alternative ways to provide for retirement. Voting over the size of social security programs could therefore be partly determined by financial development. In this paper I allow for this possibility in an OLG model where financial development may be hindered by frictions. The main implication of the model is that greater financial frictions lead to lower financial investment and higher social security transfers in the political-economy equilibrium. To explore this model implication empirically, I use countries’ legal origin as a proxy of frictions that may hold back financial development. The empirical analysis yields a strong and robust negative effect of financial development on the size of social security transfers. |
| Keywords: | social security; financial development; legal origins. |
| JEL: | H55 D91 G10 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7599&r=pub |
| By: | Witterblad, Mikael (Department of Economics, Umeå University) |
| Abstract: | This paper analyzes the composition of municipal expenditures in Sweden by estimating a demand system for local public services, in which tax revenue collection is treated as endogenous. The estimation is based on the QAIDS specification. The empirical application uses panel data for the period 1998-2005 and for six local public services. The results show that the point estimates of all income elasticities except one are positive, and that none of them significantly exceeds one. Furthermore, the point estimates of the own-price elasticities are negative and less than one in absolute value for all services. |
| Keywords: | Demand system; local public finance; local government spending |
| JEL: | D12 H71 H72 |
| Date: | 2008–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0730&r=pub |
| By: | Jorge Martinez-Vazquez; Benno Torgler |
| Abstract: | This paper studies the evolution of tax morale in Spain in the post-Franco era. In contrast to the previous tax compliance literature, the current paper investigates tax morale as the dependent variable and attempts to answer what actually shapes tax morale. The analysis uses survey data from two sources: the World Values Survey and the European Values Survey, allowing us to observe tax morale in Spain for the years 1981, 1990, 1995, and 1999/2000. The study of the evolution of tax morale in Spain over nearly a 20-year span is particularly interesting because the political and fiscal system evolved very rapidly during that period. |
| Keywords: | Spain, Tax morale, Tax compliance, Constitutional and political changes, fiscal system, endogenous preferences |
| JEL: | H26 H73 K42 O17 Z13 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:lpf:wpaper:03-2007&r=pub |
| By: | Benno Torgler |
| Abstract: | This paper analyses the impact of direct democracy and local autonomy on tax morale and the size of the shadow economy. We use two different data sets on tax morale at the individual level (World Values Survey and International Social Survey Programme) and the macro data of the size of the shadow economy to systematically analyse the effects of institutions in Switzerland, a country where participation rights and the degree of federalism vary across different cantons. The findings suggest that direct democratic rights and local autonomy, have a significantly positive effect on tax morale and the size of the shadow economy. |
| Keywords: | Tax Morale, Shadow Economy, Tax Compliance, Tax Evasion, Direct Democracy, LocalAutonomy |
| JEL: | H26 H73 D70 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:lpf:wpaper:06-2007&r=pub |