nep-pub New Economics Papers
on Public Finance
Issue of 2010‒07‒03
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Ad valorem versus unit taxes: Monopolistic competition, heterogeneous firms, and intra-industry reallocations By Philipp J.H. Schröder; Allan Sørensen
  2. The effects of the tax system on education decisions and welfare By Lari Arthur Viianto
  3. Time Discounting and Smoking Behavior under Tax Hikes By Myong-Il Kang; Shinsuke Ikeda
  4. The 2007 Personal Income Tax Reform in Italy: Effects on Potential Equity, Horizontal Inequity and Re-ranking By Simone Pellegrino; Achille Vernizzi

  1. By: Philipp J.H. Schröder (Aarhus School of Business, Aarhus University, Denmark); Allan Sørensen (School of Economics and Management, Aarhus University, Denmark)
    Abstract: Real-world industries are composed from heterogeneous firms and substantial intra-industry reallocations take place, i.e. high productivity firms squeeze out low productivity firms. Previous tax-tool comparisons have not included these central forces of industry structure. This paper examines a general equilibrium monopolistic competition model with heterogeneous firms and intra-industry reallocations. We show that the welfare superiority of ad valorem over unit taxes under imperfect competition is not only preserved but amplified. The additional difference between the tools arises because unit taxes distort relative prices, which in turn reduces average industry productivity through reallocations (the survival and increased market share of lower productivity firms). Importantly, numerical solutions of the model reveal that the relative welfare loss from using the unit tax increases dramatically in the degree of firm heterogeneity.
    Keywords: unit tax, ad valorem tax, welfare, intra-industry reallocation, monopolistic competition, heterogenous firms
    JEL: D43 D61 H21 H22 H23 L11 L13
    Date: 2010–06–23
  2. By: Lari Arthur Viianto (Universidad de Alicante)
    Abstract: I study the effects of a linear tax schedule on educational decisions and welfare in a two period model where the educational decision is discrete and its return is uncertain. I find that a linear tax rate has a positive effect on the number of agents who decide to acquire higher education. This effect becomes negative when the revenue is returned as a lump-sum transfer. The government can influence the education level to some extent using a linear tax schedule. However this policy always has a negative welfare effect. I also find that if there is a revenue need a welfare maximizing government will prefer a linear tax to a lump-sum tax.
    Keywords: Education, taxation, welfare.
    JEL: I20 I30 H20 H31
    Date: 2010–03
  3. By: Myong-Il Kang; Shinsuke Ikeda
    Abstract: By combining our broad panel survey of Japanese adults from 2005 to 2008 and actual cigarette tax data, we investigate how smoking behavior including responses to tax hikes depends on time discounting and its biases, such as hyperbolic discounting and the sign effect. Cigarette consumption displays significantly positive correlations with discount rates and the procrastinating tendency, and negative correlations with the sign effect. Hyperbolic, procrastinating, andnaïve respondents decrease their after-tax-hike cigarette consumption more than the others, implying that, irrespective of the preannouncement of a future tax hike, they postpone smoking moderation until the tax hike actually takes place. Finally, the government's revenue from cigarette tax peaks at a JPY 29.92 (around USD 0.28 using the conversion rate [107.16] in February 2008) higher tax per cigarette than the present actual level.
    Date: 2010–06
  4. By: Simone Pellegrino (Department of Economics and Public Finance "G. Prato", University of Torino); Achille Vernizzi (Department of Economics, Business and Statistics, University of Milano)
    Abstract: According to Kakwani and Lambert (1998), an equitable income tax should respect three axioms related to each taxpayer’s tax liability, average tax rate and post-tax income: whenever taxation determines unequal tax treatments among equals or modifies pre-tax ordering, it influences the potential vertical effect of the tax through three types of inequity. Following the authors’ measurement system, we investigate changes in axiom violations due to the 2007 Italian personal income tax reform, that introduced significant changes in the tax structure. Our microsimulation model uses as input data those provided by the Bank of Italy in its Survey on Households Income and Wealth in the year 2006; estimates of the distribution of taxpayers are very close to the Ministry of Finance official statistics. The analysis considers both the individual and equivalent household gross income distribution and evaluates the decomposition with and without surtaxes. Main findings suggest that both in the 2006 and 2007 tax system most of the overall violations concern the axiom demanding the average tax rate to be a non decreasing function with respect to the gross income; the axiom requiring richer taxpayers to pay higher tax liabilities than poorer ones and the axiom requiring the tax to do not introduce re-rankings in the pre-tax income order present minor violations. The 2007 reform enhances both the potential redistributive effect, that is the one that could be obtained without axiom violations, and the axiom violations: the net result is a small positive variation of the actual redistributive effect. These phenomena appear more relevant for taxpayers than those for equivalent households. For what concerns taxpayers, the 2007 reform has modified also the composition of the three axiom violations, that remains almost the same whenever equivalent households are considered. Finally, focusing on each decile of the income distribution, regressivities are concentrated in the bottom five deciles of the income distribution both for taxpayers and equivalent households.
    Keywords: Personal Income Tax, Redistributive Effect, Horizontal Inequity, Reranking, Microsimulation Models
    JEL: C81 H23 H24
    Date: 2010–06

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