nep-pub New Economics Papers
on Public Finance
Issue of 2010‒12‒23
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  2. The Effects of Bonus Taxes on Executive Compensation in a Principal-Agent Model By Helmut Dietl; Martin Grossmann; Markus Lang; Simon Wey
  3. Signaling and indirect taxation By Tom TRUYTS
  4. What drives gasoline taxes? By Fay DUNKERLEY; Amihai GLAZER; Stef PROOST
  5. The Mexican Tax-Benefit System By Absalón, Carlos; Urzúa, Carlos M.
  6. A note on Fairness and Redistribution By Rafael Di Tella; Juan Dubra

  1. By: Piero Gottardi (European University Institute); Atsushi Kajii (Institute of Economic Research, Kyoto University); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University)
    Abstract: How should capital and labor be taxed when individuals' labor income is subject to unin- surable idiosyncratic risks? To address this question, we develop a tractable infinite horizon model with incomplete markets and consider a dynamic optimal taxation problem with linear taxes on the wage and interest income. We derive two general principles for public policy in such an environment: (i) providing an insurance for the idiosyncratic income risks; and (ii) allocating tax burdens efficiently over time. The first principle calls for taxing the labor income. The second principle clarifies when accumulating government debt is welfare improving, and also when the tax rate on physical capital needs to be strictly positive in the long run. We also calibrate our model to the U.S. economy and find that the presence of idiosyncratic income risks significantly affects the optimal tax rates and the optimal amount of the government debt.
    Keywords: incomplete markets; constrained inefficiency; optimal taxation; Ramsey equilibrium.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2010–12
  2. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Simon Wey (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: The financial crisis from 2007-2010 was the worst crisis since the Great Depression. Politicians, economists and regulators search for measures to avoid such a crisis to repeat. One prominent proposal is the introduction of bonus taxes for corporate executives. In this paper, we analyze the effects of such a bonus tax on executive compensation in a principal-agent model. Our paper shows that a bonus tax may lead to the unintended result that the effort-based compensation increases at the expense of the fixed salary. The introduction of a bonus tax can further induce the principal to offer higher bonuses even though the agent always reduces his effort. The tax-induced effort reduction by the agent decreases with an increase in the product of risk aversion and uncertainty. Moreover, a bonus tax will decrease social welfare unless the social planner puts a sufficiently high weight on tax revenue. Finally, we present simulation results for two general classes of effort cost functions.
    Keywords: Principal-agent model, bonus tax, labor taxation, executive compensation, financial regulation
    JEL: H24 J30 M52
    Date: 2010–12
  3. By: Tom TRUYTS
    Abstract: Commodities communicate. Consumers choose a consumption bundle both for its intrinsic characteristics and for what this bundle communicates about their qualities (or .identity.) to spectators. We investigate optimal indirect taxation when consumption choices are motivated by two sorts of concerns: intrinsic consumption and costly signaling. Optimal indirect taxes are introduced into a monotonic signaling game with a finite typespace of consumers. We provide sufficient conditions for the uniqueness of the D1 sequential equilibrium in terms of strategies. In the case of pure costly signaling, signaling goods can in equilibrium be taxed without burden and the optimal quantity taxes on these goods are infinite. When commodities serve both intrinsic consumption and signaling, optimal taxes can be characterized by a generalization of the Ramsey rule, which also deals with the distortions resulting from signaling.
    Keywords: Optimal Taxation, Indirect Taxation, Costly Signaling, Identity.
    JEL: C72 H21
    Date: 2010–04
  4. By: Fay DUNKERLEY; Amihai GLAZER; Stef PROOST
    Abstract: Gasoline taxes are the most important tax on car use. The question naturally arises as to what tax would be adopted by a government that responds to the preferences of the public. To address that issue, we begin with the standard Downsian model, where policy is determined by the median voter. This model predicts that as long as the median voter is not a car user, he wants high taxes on road use and a road capacity that maximizes net tax revenues. When he becomes a driver himself, he wants road user taxes that are lower and only increase to control congestion, as well as more road capacity. We then use panel data for 28 countries and find support for our theory. When the median voter becomes a driver, the gasoline tax drops on average by 20%.
    Keywords: gasoline taxes, median voter theory, political economy
    JEL: H23 R48 Q48 L98 Q52
    Date: 2010–01
  5. By: Absalón, Carlos (Universidad Autónoma de Puebla); Urzúa, Carlos M. (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: After the economic crisis that erupted in 1994, extreme poverty in Mexico increased steadily until it ended up affecting more than one third of the population in 1996. Since then, the government has increased substantially social benefits, directing most of its efforts toward reducing poverty (the percentage of population living in poverty, although still high, is now lower than in the pre-crisis years). Regarding the tax system, in 2007 the Congress enacted several changes in the case of income taxes and some excise taxes. Thus, on both sides, benefits and taxes, there have been several recent reforms in Mexico that are worth to study in a micro-simulation framework.
    Keywords: Mexico, tax system, benefit system, impuestos, prestaciones sociales
    JEL: H20 H24 H50 H55 O54
    Date: 2009–06
  6. By: Rafael Di Tella (Harvard Business School, Business, Government and the International Economy Unit); Juan Dubra (Universidad de Montevideo)
    Abstract: We note some problems in Alesina and Angeletos (2005) and suggest a way to maintain the key insight of that paper, which is that a demand for fairness could lead to different economic systems such as those observed in France versus the US (multiple equilibria).
    Keywords: Inequality, taxation, redistribution, political economy.
    JEL: D31 E62 H2 P16
    Date: 2010–12

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