nep-pub New Economics Papers
on Public Finance
Issue of 2010‒05‒29
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimum taxation of bequests in a model with initial wealth By Johann K. Brunner; Susanne Pech
  2. An Empirical Model of Tax Convexity and Self-Employment By Jean-Francois Wen; Daniel V. Gordon
  3. Externality-correcting taxes and regulation. By Christiansen, V.; Smith, S.
  4. Accounting for Family Background when Designing Optimal Income Taxes. A Microeconometric Simulation Analysis By Rolf Aaberge and Ugo Colombino

  1. By: Johann K. Brunner; Susanne Pech
    Abstract: We formulate an optimum-taxation model, where parents leave bequests to their descendants for altruistic reasons. In contrast to the standard model, individuals differ not only in earning abilities, but also ininitial (inherited) wealth. In this model a redistributive motive for an inheritance tax - which is equivalent to a uniform tax on all expenditures - arises, given that initial wealth increases with earning abilities. Its introduction increases intertemporal social welfare or has an ambiguous effect, depending on whether the bequeathing generation can adjust their behaviour and whether the external effect related to altruism is accounted for in the social objective.
    Date: 2010–01
  2. By: Jean-Francois Wen; Daniel V. Gordon
    Abstract: We extend the theoretical model of Rees and Shah (1986) to incorporate the effects of marginal tax rate progression and income transfers, as arguments in the individual's utility choice model between self-employment and paid- employment. Measures of the degree of progressivity in the tax and transfer system are constructed from the concept of tax convexity (Gentry and Hubbard, 2000, 2004). The earnings equations are corrected for self-selection bias and are combined with the Canadian Tax and Credit Simulator (Milligan, 2007) to calculate tax both the predicted net-of-tax earnings and the tax convexity variables in the self-employment/employed labor choice decision. The model is estimated using data spanning 1999-2005 from Statistics Canada's Survey of Labour and Income Dynamics. The principal Â…findings are that the tax convexity variables and the net income difference between self- and paid-employment have the predicted signs and high levels of statistical signfiÂ…cance in the structural probit model. We use the model to estimate the effects of federal tax rate reductions in 2001 on the rate of self-employment in Canada.
    Date: 2010–01–17
  3. By: Christiansen, V.; Smith, S.
    Abstract: Much of the literature on externalities has considered taxes and direct regulation as alternative policy instruments. Both instruments may in practice be imperfect, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider cases where taxes are either imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases we characterise the optimal instrument mix, and show how changing the level of direct regulation alters the optimal externality tax.
    Date: 2009–09
  4. By: Rolf Aaberge and Ugo Colombino (Statistics Norway)
    Abstract: The purpose of this paper is to introduce and adopt a generalised version of Roemer's (1998) Equality of Opportunity (EOp) framework, which we call extended EOp, for analysing second-best optimal income taxation. Unlike the pure EOp criterion of Roemer (1998) the extended EOp criterion allows for alternative weighting profiles in the treatment of income differentials between as well as within types when types are defined by circumstances that are beyond people's control. This study uses parental education as a measure of exogenous circumstances. An empirical microeconometric model of labour supply in Italy is employed to simulate and identify income tax-transfer rules that are optimal according to the extended EOp criterion. We look for second-best optimality, i.e. the tax-transfer rules are not allowed to depend on family background, they only depend on income: family background is taken indirectly into account. The rules are defined by a universal (not individualized) lump-sum transfer (positive or negative) and by one or two marginal tax rates. A rather striking result of the analysis is that the optimal tax-transfer rule turns out to be a universal lump-sum tax (with marginal tax rates equal to zero), under Roemer's pure EOp criterion as well as under the generalised EOp criterion with moderate degrees of aversion to within-type inequality. A higher degree of within-type inequality aversion instead produces EOp-optimal rules with positive marginal tax rates. When the EOp-version of the Gini welfare function is adopted, the optimal tax rule turns out to be close to the actual 1993 Italian tax system, if not for the important difference of prescribing a universal lump-sum positive transfer of 3,500,000 ITL (= 1807 Euros), which has no comparable counterpart in the actual system. On the other hand, when using the conventional equality of outcome (EO) criterion, the pure lump-sum tax always turns out to be optimal, at least with respect to the classes of two- and three-parameter rules. We also compute optimal rules under the additional constraint that universal lump-sum taxes are not feasible. Overall, the results do not conform to the perhaps common expectation that the EO criterion is more supportive of “interventionist” (redistributive) policies than an extended EOp approach.
    Keywords: Equality of opportunity; equality of outcome; labour supply; optimal income taxation
    JEL: D19 D63 H21 H24 H31
    Date: 2010–05

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