nep-pub New Economics Papers
on Public Finance
Issue of 2012‒04‒23
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Theory of Optimal Capital Taxation By Thomas Piketty; Emmanuel Saez
  2. Identification of income-leisure preferences and evaluation of income tax policy By Charles Manski
  3. "Should the Japanese Tax System Be More Progressive? An Evaluation Using Simulated SMCFs Based on the Discrete Choice Model of Labor Supply" By Shun-ichiro Bessho; Masayoshi Hayashi
  4. Does Fiscal Decentralisation Foster Regional Investment in Productive Infrastructure? By Andreas Kappeler; Albert Solé-Ollé; Andreas Stephan; Timo Välilä

  1. By: Thomas Piketty; Emmanuel Saez
    Abstract: This paper develops a realistic, tractable theoretical model that can be used to investigate socially-optimal capital taxation. We present a dynamic model of savings and bequests with heterogeneous random tastes for bequests to children and for wealth per se. We derive formulas for optimal tax rates on capitalized inheritance expressed in terms of estimable parameters and social preferences. Under our model assumptions, the long-run optimal tax rate increases with the aggregate steady-state flow of inheritances to output, decreases with the elasticity of bequests to the net-of-tax rate, and decreases with the strength of preferences for leaving bequests. For realistic parameters of our model, the optimal tax rate on capitalized inheritance would be as high as 50%-60%–or even higher for top wealth holders–if the social objective is meritocratic (i.e., the social planner puts higher welfare weights on those receiving little inheritance) and if capital is highly concentrated (as it is in the real world). In contrast to the Atkinson-Stiglitz result, the optimal tax on bequest remains positive in our model even with optimal labor taxation because inequality is two-dimensional: with inheritances, labor income is no longer the unique determinant of lifetime resources. In contrast to Chamley-Judd, the optimal tax on capital is positive in our model because we have finite long run elasticities of inheritance to tax rates. Finally, we discuss how adding capital market imperfections and uninsurable shocks to rates of return to our optimal tax model leads to shifting one-off inheritance taxation toward lifetime capital taxation, and can account for the actual structure and mix of inheritance and capital taxation.
    JEL: H21
    Date: 2012–04
  2. By: Charles Manski (Institute for Fiscal Studies and Northwestern University)
    Abstract: <p>The merits of alternative income tax policies depend on the population distribution of preferences for income and leisure. Standard theory, which supposes that persons want more income and more leisure, does not predict how they resolve the tension between these desires. Empirical studies of labor supply have imposed strong preference assumptions that lack foundation. This paper examines anew the problem of inference on income-leisure preferences and considers the implications for evaluation of tax policy. I first perform a basic revealed-preference analysis assuming only that persons prefer more income and leisure. This shows that observation of a person's time allocation under a status quo tax policy may bound his allocation under a proposed policy or may have no implications, depending on the tax schedules and the person's status quo time allocation. I next explore the identifying power of two classes of assumptions that restrict the distribution of income-leisure preferences. One assumes that groups of persons who face different choice sets have the same preference distribution. The second restricts the shape of this distribution. The generic finding is partial identification of preferences. This implies partial prediction of tax revenue under proposed policies and partial knowledge of the welfare function for utilitarian policy evaluation. </p>
    Date: 2012–03
  3. By: Shun-ichiro Bessho (Faculty of Economics, Keio University); Masayoshi Hayashi (Faculty of Economics, University of Tokyo)
    Abstract: This paper evaluates the 1999 national income tax reform in Japan by comparing the social marginal costs of public funds (SMCFs) for changing the marginal tax rates in different income brackets before the reform occurred. To do so, we estimate the discrete choice model of labor supply using a data set of Japanese households in 1997 derived from the Employment Status Survey. We obtain an analog of the SMCF that allows for labor supply responses along both the intensive and the extensive margins on an individual basis. We generate such SMCFs using a micro-simulation method that utilizes the discrete choice model estimates for household preferences. Based on the simulated SMCFs evaluated using various distributional weights, we find that the value of the SMCF for a 1% increase in the marginal tax rate in any given income bracket decreases as the bracket moves from the bottom to the top. This finding suggests that the national government should have made the Japanese income tax system more progressive rather than less progressive as carried out in the 1999 reform. </table>
    Date: 2012–04
  4. By: Andreas Kappeler; Albert Solé-Ollé; Andreas Stephan; Timo Välilä
    Abstract: The aim of this paper is to analyze the effect of revenue decentralization on the provision of infrastructure at the sub-national level. We estimate the effects of revenue decentralization and earmarked grant financing on the level of sub-national infrastructure investment in 20 European countries over the period 1990-2009. The results are interpreted in light of the predictions of the theory on fiscal federalism. We find that it is sub-national infrastructure investment that increases after revenue decentralization and not investment in redistribution. However, the effect of revenue decentralization is lower the higher the use of earmarked grants to fund infrastructure investment.
    Keywords: regional investment, fiscal federalism, dynamic panel data
    JEL: H54 H77 H76 C23
    Date: 2012

This nep-pub issue is ©2012 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.