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on Public Finance |
| By: | Nezih Guner; Remzi Kaygusuz; Gustavo Ventura |
| 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. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:660&r=pub |
| By: | Alan Krause |
| Abstract: | This paper examines a two-period model of optimal nonlinear income taxation with learning-by-doing, in which second-period wages are an increasing function of first-period labour supply. We consider the cases when the government can and cannot commit to its second-period tax policy. In both cases, the canonical Mirrlees/Stiglitz results regarding optimal marginal tax rates no longer apply. In particular, if the government cannot commit and skill-type information is revealed, it is optimal to distort the high-skill consumer's labour supply downwards through a positive marginal tax rate to relax the incentive-compatibility constraint. Alternatively, if the government cannot commit and skill-type information is concealed, it is optimal to distort the high-skill consumer's labour supply upwards to relax the incentive-compatibility constraint, but due to some other factors at work the high-skill consumer's marginal tax rate cannot be signed. Our analysis therefore identifies a setting in which a positive marginal tax rate on the highest-skill individual can be justified, despite its depressing effect on labour supply and wages. |
| Keywords: | Income taxation, learning-by-doing, commitment. |
| JEL: | H21 H2 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/08&r=pub |
| By: | Rolf Aaberge; Ugo Colombino |
| Abstract: | The purpose of this paper is to present an exercise where we identify optimal income tax rules according to various social welfare criteria, keeping fixed the total net 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 labour supply 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 9-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. The parameters to be determined are an exemption level, four marginal tax rates, three “kink points” and a lump sum transfer that can be positive (benefit) or negative (tax). We explore a variety of social welfare functions with differing degree of inequality aversion. 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: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpc:wplist:wp06_08&r=pub |
| By: | Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Marco Sahm (University of Munich) |
| Abstract: | We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases. |
| Keywords: | Public goods, optimal taxation, two-dimensional heterogeneity, asymmetric information |
| JEL: | H41 D71 D72 D82 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2008_9&r=pub |
| By: | John Geanakoplos; Stephen P. Zeldes |
| Abstract: | The heated debate about how to reform Social Security has come to a standstill because the view of most Democrats (that Social Security must be a defined benefits plan similar in spirit to the current system) seems irreconcilable with the proposals supported by many Republicans (to create a defined contribution system of personal accounts holding marketed assets). We describe a system of "progressive personal accounts" that preserves the core goals of both parties, and that is self-balancing on an ongoing basis. Progressive personal accounts have two critical features: (1) accruals into the personal accounts would be exclusively in a new kind of derivative security (which we call a PAAW for Personal Annuitized Average Wage security) that pays its owner one inflation-corrected dollar during every year of life after his statutory retirement date, multiplied by the economy wide average wage at the retirement date and (2) households would buy their new PAAWs each year with their social security contributions, augmented or reduced by a government match that would add to contributions from households with low lifetime incomes by taking from households with high lifetime incomes. PAAWS define benefits and achieve risk sharing across generations, as Democrats would like, yet can be held in personal accounts with market valuations, as Republicans propose. |
| JEL: | D91 E6 H55 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13979&r=pub |
| By: | David Y. Albouy |
| Abstract: | In the United States, workers in cities offering above-average nominal wages – cities with high productivity, low quality-of-life, or inefficient housing sectors – pay 30 percent more in federal taxes than otherwise identical workers in cities offering below-average wages. According to simulation results, federal taxes lower long-run employment levels in high-wage areas by 15 percent and land and housing prices by 25 and 4 percent, leading to locational inefficiencies costing 0.28 percent of income, or $34 billion in 2005. Indexing taxes to local wage-levels eliminates these locational inefficiencies. Tax deductions index taxes partially to local cost-of-living and improve locational efficiency. |
| JEL: | H24 H5 H77 J61 R1 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13995&r=pub |
| By: | Gilbert E. Metcalf; Sergey Paltsev; John Reilly; Henry Jacoby; Jennifer F. Holak |
| Abstract: | The U.S. Congress is considering a set of bills designed to limit the nation's greenhouse gas (GHG) emissions. This paper complements the analysis by Paltsev et al. (2007) of cap-and-trade bills and applies the MIT Emissions Prediction and Policy Analysis (EPPA) model to carry out an analysis of the tax proposals. Several lessons emerge from this analysis. First, a low starting tax rate combined with a low rate of growth in the tax rate will not reduce emissions significantly. Second, the costs of GHG reductions are reduced with the inclusion of non-CO2 gases in the carbon tax scheme. Third, welfare costs of the policies can be affected by the rate of growth of the tax, even after controlling for cumulative emissions. Fourth, a carbon tax -- like any form of carbon pricing -- is regressive. However, general equilibrium considerations suggest that the short-run measured regressivity may be overstated. Additionally, the regressivity can be offset with a carefully designed rebate of some or all of the revenue. Finally, the carbon tax bills that have been proposed or submitted are for the most part comparable to many of the carbon cap-and-trade proposals that have been suggested. Thus the choice between a carbon tax and cap-and-trade system can be made on the basis of considerations other than their effectiveness at reducing emissions over some control period. |
| JEL: | H23 Q54 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13980&r=pub |
| By: | Aleksandra Riedl (Institute for Economic Geography and GIScience, Vienna University of Economics and Business Administration,); Silvia Rocha-Akis (Department of Economics, Vienna University of Economics and Business Administration,) |
| Abstract: | In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country's taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 Western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries' tax bases are more responsive to neighbouring countries' tax policies, which is in contrast to the classic asymmetric tax competition literature. |
| Keywords: | tax competition, corporate income tax base elasticity, asymmetric countries,instrumental variables, spatial econometrics. |
| JEL: | H71 H72 H77 H87 C21 C23 |
| Date: | 2008–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:142&r=pub |