nep-pub New Economics Papers
on Public Finance
Issue of 2012‒05‒15
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Savings Taxation when Individuals have Different CRRA Utility Functions By Alan Krause
  2. Optimal income taxation with asset accumulation By Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola
  3. Why do we Redistribute so Much but Tag so Little? The principle of equal sacrifice and optimal taxation By Matthew C. Weinzierl
  4. Laffer Strikes Again: Dynamic Scoring of Capital Taxes By Holger Strulik; Timo Trimborn
  5. Tax Competition and Income Inequality: Why did the Welfare State Surviv By Troeger, Vera; Plumper, Thomas
  6. Fiscal stimulus and distortionary taxation By Thorsten Drautzburg; Harald Uhlig
  7. Migrations, public goods and taxes By Jean J. Gabszewicz; Salome Gvetadze; Skerdilajda Zanaj
  8. (Un)Informed Charitable Giving By Silvana Krasteva; Huseyin Yildirim

  1. By: Alan Krause
    Abstract: Recent empirical research has found that high-skill individuals tend to be less risk averse than low-skill individuals, which implies that their respective constant relative risk aversion (CRRA) utility functions have different curvature. This paper examines the effects of this form of preference heterogeneity on the classic question of whether taxing savings is desirable when the government also implements optimal nonlinear income taxation. It is shown that taxing or subsidising savings may be optimal, even if labour is separable from consumption in the utility function. Specifically, if the individuals' discount rate is lower (resp. higher) than the market interest rate, it is optimal to tax (resp. subsidise) savings. If the individuals' discount rate is equal to the market interest rate, zero taxation of savings is optimal. This basic relationship holds under both linear and nonlinear taxation of savings.
    Keywords: Savings taxation; nonlinear income taxation; preference heterogeneity.
    JEL: H21 H24
    Date: 2012–05
  2. By: Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola
    Abstract: Several frictions restrict the government's ability to tax assets. First of all, it is very costly to monitor trades on international asset markets. Moreover, agents can resort to non-observable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset observability have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we …find that optimal labor income taxes typically become less progressive when assets are imperfectly observed. We evaluate the effect quantitatively in a model calibrated to U.S. data.
    Keywords: Optimal Income Taxation; Capital Taxation; Asset Accumulation; Progressivity
    JEL: H21 D82 E21
    Date: 2012–05–03
  3. By: Matthew C. Weinzierl
    Abstract: Tagging is a free lunch in conventional optimal tax theory because it eases the classic tradeoff between efficiency and equality. But tagging is used in only limited ways in tax policy. I propose one explanation: conventional optimal tax theory has yet to capture the diversity of normative principles with which society evaluates taxes. I generalize the conventional model to incorporate multiple normative frameworks. I then show that if the principle of equal sacrifice--a classic, comprehensive criterion of fair taxation proposed by John Stuart Mill and associated with the Libertarian normative framework--is given some weight in the social objective function, tagging generates costs that must be weighed against the benefits it generates through conventional channels. Only tags that are sufficiently predictive of ability, such as disability status, will be used. Calibrated simulations using micro data from the United States show that optimal policy may simultaneously include substantial redistribution across income-earning abilities, as in the standard model, and reject three prominently-proposed tags--gender, race, and height--as in actual policy. This explanation for limited tagging also implies that optimal marginal tax rates at high incomes are lower than in standard analysis and closer to those observed in policy.
    JEL: D63 H2 H21
    Date: 2012–05
  4. By: Holger Strulik; Timo Trimborn
    Abstract: We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax.
    Keywords: Corporate Taxation, Capital Gains, Tax Allowances, Revenue Estimation, Laffer Curve, Dynamic Scoring.
    JEL: E60 H20 O40
    Date: 2011–09
  5. By: Troeger, Vera (University of Warwick); Plumper, Thomas (University of Essex)
    Abstract: Contrary to the belief of many, tax competition did not undermine the foundations of the welfare state and did not even abolish the taxation of capital. Instead, tax competition caused governments to shift the tax burden from capital to labor, thereby increasing income inequality in liberal market economies that traditionally redistribute income by relatively high effective capital taxes and relatively low effective labor taxes. In contrast, income inequality did increase little or not at all in social welfare states that dominantly use social security transfers to redistribute income. Governments in social welfare states found it easy to maintain high social expenditures because they increasingly taxed labor, which is relatively immobile, to finance social security transfers. We test the predictions of this theory using a simultaneous equation approach that accounts for the endogeneity of tax policies, fiscal policies, and deficits.
    Date: 2012
  6. By: Thorsten Drautzburg; Harald Uhlig
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act of 2009. We extend the benchmark Smets-Wouters New Keynesian model (Smets and Wouters, 2007), allowing for credit-constrained households, the zero lower bound, government capital, and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound, and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain if they discount the future substantially.
    Date: 2011
  7. By: Jean J. Gabszewicz (CORE Université catholique de Louvain); Salome Gvetadze (CREA, University of Luxembourg); Skerdilajda Zanaj (CREA, University of Luxembourg)
    Abstract: This paper examines how and why people migrate between two re- gions with asymmetric size. The agglomeration force comes from the scale economies in the provision of local public goods, whereas the disper- sion force comes from congestion in consumption of public goods. Public goods considered resemble club goods (or public goods with congestion) and people are heterogeneous in their migration costs. We find that the large countries can be destination of migrants for sufficiently high provision of public goods, even when the large country taxes too much. The high provision of public good offsets the congestion effect. While, the small country can be the destination of migrants for two reasons. Firstly, when public good supply is intermediate, people move to avoid congestion in the large country and to benefit from low taxation in the small one. Finally, when the provision of public goods is low, people move towards the small countries just to avoid congestion.
    Keywords: Migration, public goods, congestion.
    JEL: H0 F3
    Date: 2011
  8. By: Silvana Krasteva; Huseyin Yildirim
    Abstract: Evidence suggests that donors have little demand for information before giving to charity. To understand this behavior and its policy implications, we present a model in which each individual can acquire costly information about her true value of charity. We observe that an individual who considers giving less is less likely to become informed; and indeed, an uninformed donor is, on average, less generous than an informed one. This implies that since the free-rider problem in giving worsens in a larger population, the percentage of informed givers becomes vanishingly small, leaving the total expected donations strictly below its highest level to be reached by a fully informed population. We show that while a direct government grant to the charity causes severe crowding-out by discouraging information acquisition, a matching grant increases donations by encouraging it. We further show that a “warm-glow” motive for giving does not necessarily weaken incentives to be informed, and that a (first-order) stochastic increase in true values for charity may actually decrease donations.
    Keywords: charitable giving, search cost, value of information, crowding-out, warm-glow
    JEL: H00 H41 D82 D83
    Date: 2011

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