nep-pub New Economics Papers
on Public Finance
Issue of 2008‒11‒25
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Income Taxation of Married Couples : An Emprical Analysis of Joint and Individual Taxation By Peter Haan; Dolores Navarro
  2. Optimal Income Taxation with Endogenous Participation and Search Unemployment By Lehmann, Etienne; Parmentier, Alexis; Van der Linden, Bruno
  3. On the role of progressive taxation in a Ramsey Model with heterogeneous households. By Stefano Bosi; Thomas Seegmuller
  4. Taxing Corporate Income By Alan J. Auerbach; Michael P. Devereux; Helen Simpson
  5. Corporate Income Tax and Economic Distortions By Gaëtan Nicodème
  6. Corporation Tax Asymmetries:Effective Tax Rates and Profit Shifting By John Creedy; Norman Gemmell
  7. Behavioural Responses to Corporate Profit Taxation By John Creedy; Norman Gemmell
  8. Taxing sin goods and subsidizing health care By CREMER, Helmuth; DE DONDER, Philippe; MALDONADO, Dario; PESTIEAU, Pierre
  9. Optimal tax policy and expected longevity: a mean and variance approach By LEROUX, Marie-Louise; PONTHIERE, Grégory
  10. Between-Group Transfers and Poverty-Reducing Tax Reforms? By Paul Makdissi; Stéphane Mussard
  11. Mixed duopoly, privatization and the shadow cost of public funds By CAPUANO, Carlo; DE FEO, Giuseppe
  12. Bargaining over public goods. By Julio Davila; Jan Eeckhout; César Martinelli
  13. Bootstrap Panel Granger-Causality Between Government Spending and Revenue By António Afonso; Cristophe Rault

  1. By: Peter Haan; Dolores Navarro
    Abstract: In this paper we develop a discrete model of optimal taxation of married couples and empirically discuss the optimality of income taxation for this group. To this end, we derive the social welfare function which guarantees that joint taxation of married couples is optimal. We will contrast this welfare function with the one that makes a system of individual taxation optimal. For the empirical application we use a static structural labor supply model to estimate the preferences of households. We find that the system of joint taxation is only optimal when the government has a high taste for redistribution towards one-earner couples and a very low or even negative taste for redistribution towards couples in which both partners earn a similar amount of income. In contrast, the optimality of individual taxation is less dependent of the working composition within the household.
    Keywords: Optimal taxation of married couples, joint taxation, labor supply estimation
    Date: 2008
  2. By: Lehmann, Etienne (CREST-INSEE); Parmentier, Alexis (University of Evry); Van der Linden, Bruno (Catholic University of Louvain)
    Abstract: This paper characterizes the optimal redistributive taxation when individuals are heterogeneous in two exogenous dimensions: their skills and their values of non-market activities. Search-matching frictions on the labor markets create unemployment. Wages, labor demand and participation are endogenous. The government only observes wage levels. Under a Maximin objective, if the elasticity of participation decreases along the distribution of skills, at the optimum, the average tax rate is increasing, marginal tax rates are positive everywhere, while wages, unemployment rates and participation rates are distorted downwards compared to their laissez-faire values. A simulation exercise confirms some of these properties under a general utilitarian objective. Taking account of the wage-cum-labor demand margin deeply changes the equity-efficiency trade-off.
    Keywords: non-linear taxation, redistribution, adverse selection, random participation, unemployment, labor market frictions
    JEL: D82 H21 J64
    Date: 2008–10
  3. By: Stefano Bosi (EQUIPPE - Université de Lille 1 et EPEE - Université d'Evry); Thomas Seegmuller (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: The aim of this paper is to study the role of progressive tax rules on the allocations of steady state and the stability properties in a Ramsey economy with heterogeneous households and borrowing constraints. Since labor supply in elastic, considering different tax rates on capital and labor incomes is relevant. The steady state analysis allows us to highlight the existence of different types of stationary equilibria. While patient agents always hold capital, impatient ones have or not positive savings, depending on the leval of real interest rate. Furthermore, it is not always optimal for all households to have a positive labor supply. Studying the comparative statics and local dynamics, we focus on the steady state with a segmented population : patient households own the whole stock of capital, while the impatient ones are workers. Varying the population sizes and the tax rates, we underline the crucial role of fiscal progressivity and endogenous labor. Moreover, in contrast to many contributions, we prove that progressive tax rules can promote expectation-driven fluctuations and endogenous cycles which means that progressivity can be inopportune to stabilize macroeconomic volatility.
    Keywords: Progressive taxation, heterogeneous agents, borrowing constraint, endogenous labor supply, steady state allocation, macroeconomic stability.
    JEL: C62 H20 E32
    Date: 2008–06
  4. By: Alan J. Auerbach; Michael P. Devereux; Helen Simpson
    Abstract: Following Meade (1978), we reconsider issues in the design of taxes on corporate income. We outline developments in economies and in economic thought over the last thirty years, and investigate how these developments should affect the design of taxes on corporate income. We consider a number of tax systems which have been proposed, distinguishing them in two main dimensions: the definition of what is to be taxed, and where it is to be taxed. We suggest that a tax levied on economic rent accruing in the corporate sector, and on a destination basis, merits serious consideration. We discuss alternative approaches, including both R-based and R+F-based flow-of-funds taxes and an ACE allowance. It is the destination basis – with border adjustments for exports and imports – which primarily distinguishes our suggestions from those of Meade (1978).
    JEL: G32 H25
    Date: 2008–11
  5. By: Gaëtan Nicodème (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and European Commission.)
    Abstract: As any non-lump-sum tax, corporate income taxation creates distortions in economic choices, reducing its efficiency. This paper reviews some of these domestic and international distortions and their most recent estimates from the economic literature. Distortions originating from income shifting between capital and labour sources, profit shifting across jurisdictions, the effects of taxation on business location and foreign direct investment are the major sources of distortions.
    Keywords: Corporate taxation, distortions, tax efficiency.
    JEL: H25
    Date: 2008–11
  6. By: John Creedy; Norman Gemmell
    Abstract: This paper examines the way in which the asymmetric treatment of losses within corporate tax codes can be expected to affect behavioural responses to changes in tax rates. The paper introduces the concept of an equivalent tax function, raising the same present value of tax payments as the actual function, in which the effective rate on losses in any period, and thus the degree of asymmetry, is explicit. The influence on the elasticity of tax revenue with respect to the tax rate of this effective rate is then examined, where ‘loss-shifting’ occurs. Results suggest that estimates of the behavioural effect of changes in tax rates on tax revenues can be expected in general to be smaller in regimes that involve greater asymmetries in the tax treatement of losses. As losses vary over the economic cycle, asymmetric treatment also generates effects on tax revenues that are asymmetric (non-linear) between above-trend and below-trend parts of the cycle.
    Keywords: n/a
    Date: 2008
  7. By: John Creedy; Norman Gemmell
    Abstract: This paper examines behavioural responses by companies to changes in profit taxation in their home country. The elasticity of tax revenue with respect to changes in the corparation tax rate are decomposed into a variety of responses. As well as distinguishing real from profitshifting responses, it is important to separate the responses of gross profits from those of deductions (such as claims for past or current losses) where these are endogenously related to gross profits declared at home. This endogenous response can be expected to differ over the business cycle, which can be important for empirical estimates of aggregate behavioural responses especially, but not exclusively, during cyclical downturns. It is suggested that the revenue elasticity can be expected to be asymmetrical between periods of above- and belowtrend growth, arising from the asymmetric treatment of losses by the tax function.
    Keywords: n/a
    Date: 2008
  8. By: CREMER, Helmuth; DE DONDER, Philippe; MALDONADO, Dario; PESTIEAU, Pierre (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.
    Keywords: paternalism, behavioral, economics, dual self v single self.
    JEL: H21 I18
    Date: 2008–05
  9. By: LEROUX, Marie-Louise (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); PONTHIERE, Grégory
    Abstract: This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, we develop a two-period model where agents's preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some – agent-specific – sensitivity to what Allais (1953) calls the 'dispersion of psychological values'. It is shown that if agents ignore the impact of their health expenditures on the return of their savings, the decentralization of the first-best optimum requires not only intergroup lump-sum transfers, but, also, group-specific taxes on health spending. Under asymmetric information, we find that a subsidy on savings is optimal, whereas group-specific taxes on health spending are of ambiguous signs.
    Keywords: longevity, risk, lotteries of life, expected utility theory, health spending.
    JEL: D81 H21 I12 I18 J18
    Date: 2008–06
  10. By: Paul Makdissi (Department of Economics, University of Ottawa); Stéphane Mussard (LAMETA, Université de Montpellier I)
    Abstract: In this paper, we propose the conception of Within-group Consumption-Dominance Curves in order to capture the impact of indirect tax reforms on poverty. Considering that the population is partitioned into many groups, which differ in needs, in health, in capability or other attributes, we introduce within-group transfers and between-group transfers via indirect taxation mechanisms in order to reduce the poverty for the entire population and the poverty in particular population sub-groups. We show that these taxation schemes are useful for many reasons: there is no need to estimate demand functions; the tax reforms are robust over a large range of poverty indices; the methodology relies on a stochastic dominance approach.
    Keywords: Between-group redistribution; Poverty; Restricted stochastic dominance; Tax reforms.
    JEL: D63 H20
    Date: 2008
  11. By: CAPUANO, Carlo (University of Naples Federico II); DE FEO, Giuseppe (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: The purpose of this paper is to investigate the effect of privatization in a mixed duopoly, where a private firm competes in quantities with a welfare-maximizing public firm. We consider two inefficiencies of the public sector: a possible cost inefficiency, and an allocative inefficiency due to the distortionary effect of taxation (shadow cost of public funds). Furthermore, we analyze the effect of privatization on the timing of competition by endogenizing the determination of simultaneous (Nash-Cournot) versus sequential (Stackelberg) games using the model developed by Hamilton and Slutsky (1990). The latter is especially relevant for the analysis of privatization, given that results and policy prescription emerged in the literature crucially rely on the type of competition assumed. We show that privatization has generally the effect of shifting from Stackelberg to Cournot equilibrium and that, absent efficiency gains privatization never increases welfare. Moreover, even when large efficiency gains are realized, an inefficient public firm may be preferred.
    Keywords: mixed oligopoly, privatization, endogenous timing, distortionary taxes.
    JEL: H2 H42 L13 L32 L33
    Date: 2008–03
  12. By: Julio Davila (Centre d'Economie de la Sorbonne - Paris School of Economics); Jan Eeckhout (University of Pennsylvania); César Martinelli (Instituto Technologico Autonomo de Mexico)
    Abstract: In a simple public good economy, we propose a natural bargaining procedure whose equilibria converge to Lindahl allocations as the cost of bargaining vanishes. The procedure splits the decision over the allocation in a decision about personalized prices and a decision about output levels for the public good. Since this procedure does not assume price-taking behavior, it provides a strategic foundation for the personalized taxes inherent to the Lindahl solution to the public goods problem.
    Keywords: Public goods, bargaining, alternating offers.
    JEL: C78 H41
    Date: 2008–06
  13. By: António Afonso; Cristophe Rault
    Abstract: Using bootstrap panel analysis, allowing for cross-country correlation, without the need of pre-testing for unit roots, we study the causality between government revenue and spending for the EU in the period 1960-2006. Spend-and-tax causality is found for Italy, France, Spain, Greece, and Portugal, while tax-and-spend evidence is present for Germany, Belgium, Austria Finland and the UK, and for several EU New Member States.
    Keywords: panel causality; fiscal policy; EU.
    JEL: C23 E62 H62
    Date: 2008–07

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