New Economics Papers
on Public Finance
Issue of 2011‒06‒11
four papers chosen by

  1. Mobility, Taxation and Welfare By Sami Bibi; Jean-Yves Duclos; Abdelkrim Araar
  2. The Tax Benefit of Income Smoothing By Rydqvist, Kristian; Schwartz, Steven; Spizman, Joshua
  3. Inequality, Tax Avoidance, and Financial Instability By Landier, Augustin; Plantin, Guillaume
  4. A Pigovian Approach to Liquidity Regulation By Enrico Perotti; Javier Suarez

  1. By: Sami Bibi; Jean-Yves Duclos; Abdelkrim Araar
    Abstract: Income mobility is often thought to equalize permanent incomes and thereby to improve social welfare. The welfare analysis of mobility often fails, however, to account for the cost of the variability of periodic incomes around permanent incomes. This paper assesses the net welfare benefit of mobility by assuming both a social aversion to inequality in permanent incomes and an individual aversion to variability in periodic incomes. The paper further investigates the combined (and comparative) impact of mobility and of the tax system (another presumed income equalizer) on the dynamics of income across time and on the inequality of income across individuals. Using panel data, we find that Canada’s tax system limits significantly the redistributive impact of mobility while also lowering considerably the cost of income variability. The permanent income equalizing effect of taxes can reach up to 23 percent of mean income at the higher values of inequality aversion that we use. Globally, the net social welfare effect of both mobility and taxation is (almost always) positive and substantial, often amounting to around 30 percent of mean income. For all choices of parameter values, the tax effect exceeds by far the net effect of mobility on inequality and social welfare.
    Keywords: Mobility, social welfare, risk, income variability, inequality, permanent income
    JEL: D31 D63 H24
    Date: 2011
  2. By: Rydqvist, Kristian; Schwartz, Steven; Spizman, Joshua
    Abstract: A worker can contribute pre-tax dollars to a private pension plan. Under a progressive tax, this feature reduces income taxes. Ippolito (1986} argues that an individual in 1979 can reduce lifetime taxes by 20%. We re-examine his analysis using the complete time-series of US income tax history and find that the tax benefit of income smoothing is much smaller.
    Keywords: income tax history; private pensions; tax progressivity
    JEL: D91 G11 G18 G23 H24
    Date: 2011–06
  3. By: Landier, Augustin; Plantin, Guillaume
    Abstract: We model the link between inequality and excessive risk taking. In the presence of increasing returns to tax avoidance, the middle class is willing to take non rewarded financial risk despite risk aversion. Electoral pressure may lead an incumbent politician to endorse this excessive risk taking if the right tail of wealth distribution is sufficiently fat. By increasing the scope for tax avoidance, globalization of capital and human capital markets might have increased financial fragility.
    Keywords: financial instability; tax avoidance
    JEL: H26
    Date: 2011–05
  4. By: Enrico Perotti; Javier Suarez
    Abstract: This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relative merit of price versus quantity rules, showing how they target different incentives for risk creation. When banks differ in credit opportunities, a Pigovian tax on short-term funding is efficient in containing risk and preserving credit quality, while quantity-based funding ratios are distorsionary. Liquidity buffers are either fully ineffective or similar to a Pigovian tax with deadweight costs. Critically, they may be least binding when excess credit incentives are strongest. When banks differ instead mostly in gambling incentives (due to low charter value or overconfidence), excess credit and liquidity risk are best controlled with net funding ratios. Taxes on short-term funding emerge again as efficient when capital or liquidity ratios keep risk shifting incentives under control. In general, an optimal policy should involve both types of tools.
    Keywords: liquidity requirements; liquidity risk; liquidity risk levies; macroprudential regulation; systemic risk
    JEL: G21 G28
    Date: 2011–04

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