nep-pub New Economics Papers
on Public Finance
Issue of 2011‒11‒01
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Piecewise Linear Income Taxation By Apps, Patricia; Long, Ngo Van; Rees, Ray
  2. Optimal redistributive taxation in a multi-externality model By Paul Eckerstorfer
  3. Relative Consumption Concerns and the Optimal Tax Mix By Paul Eckerstorfer
  4. Behavioral Explanation of Tax Asymmetries By Martin Fochmann; Martin Jacob
  5. A Multi-Agent Model of Tax Evasion with Public Expenditure By Paolo Pellizzari; Dino Rizzi; ;
  6. Redistribution Policy and Inequality Reduction in OECD Countries: What Has Changed in Two Decades? By Immervoll, Herwig; Richardson, Linda
  7. Redistributive Impacts of Personal Income Tax in Urban China By Jing Xu; Ximing Yue
  8. Effective Tax and Subsidy Rates on Human Capital in Canada By John B. Burbidge; Kirk A. Collins; James B. Davies; Lonnie Magee
  9. Welfare-improving Government Behaviour and Inequality - Inspection Using a Heterogeneous-agent Model By Miguel Viegas; Ana Paula Ribeiro
  10. Talking about the Pigou Paradox: Socio-Educational Background and Educational Outcomes of AlmaLaurea By Caroleo, Floro Ernesto; Pastore, Francesco

  1. By: Apps, Patricia (University of Sydney); Long, Ngo Van (McGill University); Rees, Ray (University of Munich)
    Abstract: Given its significance in practice, piecewise linear taxation has received relatively little attention in the literature. This paper offers a simple and transparent analysis of its main characteristics. We fully characterize optimal tax parameters for the cases in which budget sets are convex and nonconvex respectively. A numerical analysis of a discrete version of the model shows the circumstances under which each of these cases will hold as a global optimum. We find that, given plausible parameter values and wage distributions, the globally optimal tax system is convex, and marginal rate progressivity increases with rising inequality.
    Keywords: piecewise linear, income, taxation
    JEL: H21 H31 J22
    Date: 2011–10
  2. By: Paul Eckerstorfer (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This paper extends the previous literature on optimal redistributive taxation in the presence of externalities to a multi-externality setting. While taxes on income and on 'clean' commodities are still unaffected by the externalities, which confirms previous results, I find that the existence of more than one externality-generating commodity has important implications for the optimal Pigouvian tax rates. In general the Pigouvian parts of taxation depend also on the externalities induced by the consumption of the other commodities, implying that the interdependence of the externality-generating commodities is relevant for tax policy.
    Keywords: Optimal Taxation, Externalities
    JEL: D82 H21 H23 H24
    Date: 2011–07
  3. By: Paul Eckerstorfer (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This articles studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two-type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a non-positional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.
    Keywords: Optimal Taxation, Externalities, Relative Consumption
    JEL: D62 H21 H23
    Date: 2011–10
  4. By: Martin Fochmann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Martin Jacob (WHU - Otto Beisheim School of Management)
    Abstract: This note develops a behavioral explanation for the existence of an asymmetric tax treatment of gains and losses when investors are loss averse. We find that loss offset rules should be more restrictive for investors which are (1) more risk averse in case of gains, (2) less risk seeking in case of losses, or (3) more loss averse. Our findings have important policy implications. Tax authorities often implement identical loss offset rules for different investor clienteles. However, there should be specific loss offset rules for investors who differ in risk attitude as well as in loss aversion.
    Keywords: Asymmetric Taxation, Loss Offset Rules, Loss Aversion, Behavioral Economics
    Date: 2011–10
  5. By: Paolo Pellizzari (Department of Economics, University Of Venice Cà Foscari); Dino Rizzi (Department of Economics, University Of Venice Cà Foscari); ;
    Abstract: We develop a model where heterogeneous agents maximize their individual utility based on (after tax) income and on the level of public expenditure (as in Cowell, Gordon, 1988). Agents are different in risk aversion and in the relative preference for public expenditure with respect to personal income. In each period, an agent can optimally conceal some income based on conjectures on the perceived probability of being subject to audits, the perceived level of public expenditure and the perceived amount of tax paid by other individuals. As far as the agent-based model is concerned, we assume that the Government sets the tax rate and the penalties, uses all the revenue to finance public expenditure (with no inefficiency) and fights evasion by controlling a (random) fraction of agents. We show that, through computational experiments based on micro-simulations, stable configurations of tax rates and public expenditure endogenously form in this case as well. In such equilibrium-like situations we find: • a positive relationship between the tax rate and evasion still arises. • tax compliance mainly depends on the distribution of personal features like risk-aversion and the degree of preference for public expenditure. • an endogenous level of tax evasion that is almost not affected by reasonable rates of control. A proper choice of the tax rate results instead in voluntary partial compliance. • the enforcement of higher compliance rates requires unrealistic and costly large-scale audits.
    Keywords: Tax evasion, public expenditure, agent-based models
    JEL: H26 H40 C63
    Date: 2011
  6. By: Immervoll, Herwig (World Bank); Richardson, Linda (OECD)
    Abstract: We use a range of data sources to assess if, and to what extent, government redistribution policies have slowed or accelerated the trend towards greater income disparities in the past 20-25 years. In most countries, inequality among "non-elderly" households has widened during most phases of the economic cycle and any episodes of narrowing income differentials have usually not lasted long enough to close the gap between high and low incomes that had opened up previously. With progressive redistribution systems in place, greater inequality automatically leads to more redistribution, even if no policy action is taken. We find that, in the context of rising market-income inequality, tax-benefit systems have indeed become more redistributive since the 1980s but that this did not stop income inequality from rising: market-income inequality grew by twice as much as redistribution. Between the mid-1990s and the mid-2000s, the redistributive strength of tax-benefit systems then weakened in many countries. While growing market-income disparities were the main driver of inequality trends between the mid-1980s and mid-1990s, reduced redistribution was often the main reason why inequality rose in the ten years that followed. Benefits had a much stronger impact on inequality than social contributions or taxes, despite the much bigger aggregate size of direct taxes. As a result, redistribution policies were often less successful at counteracting growing income gaps in the upper parts of the income distribution.
    Keywords: income inequality, redistribution, working age, OECD
    JEL: D31 H22 H55 C81
    Date: 2011–10
  7. By: Jing Xu (The People's University of China); Ximing Yue (The People's University of China)
    Abstract: Not available.
    Date: 2011
  8. By: John B. Burbidge (University of Waterloo); Kirk A. Collins (St. Francis Xavier University); James B. Davies (University of Western Ontario); Lonnie Magee (McMaster University)
    Abstract: Effective tax and subsidy rates (ETRs and ESRs) on human capital investment via postsecondary education are estimated for Canada in the years 2000 and 2006. The flattening of the federal personal income tax structure in 2001 substantially reduced the tax disincentive for investment in human capital. Effective subsidy rates also declined as public spending did not keep pace with rising tuition fees. The change on the tax side was strong enough to dominate the subsidy reduction according to our main results, but disaggregation shows that this result did not hold in all cases. Results are shown for College, Master’s, and PhD programs, in addition to Bachelor’s degrees. They are also broken down by gender, and are shown for the 25th and 75th percentiles as well as the median. Provincial detail and 1997 results are provided in the case of Bachelor’s graduates.
    Date: 2011
  9. By: Miguel Viegas (GOVCOPP, DEGEI, Universidade de Aveiro); Ana Paula Ribeiro (Faculdade de Economia da Universidade do Porto and CEF.UP)
    Abstract: This paper aims at characterizing debt consolidation processes put forward by some European countries in order to assess welfare and, in particular, the inequality effects involved. For that we built a general equilibrium heterogeneous-agent model capable of exploring the relationship between fiscal policy variables and the endogenous crosssection distribution of income and wealth. Results show that, with the exception of the Belgian case, all consolidation strategies entail positive welfare gains. The transition costs affect all episodes and are determinant in sorting among the welfareenhancing strategies. Our results confirm the superiority of the adjustments based on unproductive expenditures over those based on tax increases or social transfer reductions. Finally, all strategies involve lower welfare inequality costs.
    Keywords: fiscal consolidation dynamics, European Union, heterogeneous agent model, inequality, welfare.
    JEL: E17 E60 H60 I30
    Date: 2011–10
  10. By: Caroleo, Floro Ernesto (University of Naples, Parthenope); Pastore, Francesco (University of Naples II)
    Abstract: Italy has an immobile social structure. At the heart of this immobility is the educational system, with its high direct, but especially indirect cost, due to the extremely long time necessary to get a degree and to complete the subsequent school-to-work transition. Such cost prevents the educational system from reallocating the best opportunities to all talented young people and from altering the "typical" market mechanism of intergenerational transfer of human capital and social status. About ten years after the Bologna declaration and the "3+2" reform of the university system, AlmaLaurea data relative to 2008 shows a framework not much different from that of 2000. This is apparent by looking at the socio-educational background of university graduates. Parents' educational level seems to be the main determinant of the probability to get a university degree and to get it with the highest possible grade. As previous studies have also shown, the effect of the socio-educational background on children success at the university is not direct, but through the high school track. In fact, although any secondary high school gives access to the university, nonetheless lyceums provide students with far higher quality of education than technical and professional schools.
    Keywords: intergenerational transfers, human capital, social status, Bologna declaration, "3+2" university reform, AlmaLaurea, Italy
    JEL: H52 I23 J13 J24
    Date: 2011–10

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