nep-pub New Economics Papers
on Public Finance
Issue of 2014‒11‒01
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Welfare and Inequality with Hard-to-Tax Markets By Marcelo Arbex; Enlinson Mattos; Laudo M. Ogura
  2. Optimal taxation and labour wedge in models with equilibrium unemployment By Wei Jiang
  3. Tax smoothing in a business cycle model with capital-skill complementarity By Stylianos Asimakopoulos; James Malley; Konstantinos Angelopoulos

  1. By: Marcelo Arbex (Department of Economics, University of Windsor); Enlinson Mattos (São Paulo School of Economics, Getulio Vargas Foundation); Laudo M. Ogura (Economics Department, Grand Valley State University)
    Abstract: Tax enforcement costs constrain the government's ability to observe economic activities, giving rise to hard-to-tax (HTT) markets. In this paper, we develop a Hotelling-type spatial model of sales taxation to analyze the welfare and distributional effects of the existence of HTT transactions. We show that an economy with HTT markets suffers from lower provision of public goods not only due to higher marginal cost of taxation, but also because (i) the planner might be concerned about the inequality in consumption caused by the unequal taxation across markets and (ii) the tax base might be over-extended to allow for a more inclusive taxation.
    Keywords: Sales tax; Tax evasion; Hard-to-tax markets; Public good provision.
    JEL: H1 H21 H26
    Date: 2014–10
  2. By: Wei Jiang
    Abstract: In this paper, we develop heterogeneous agent models with equilibrium unemployment to study the optimal taxation and labour wedge. We find that the the presence of profits plays an important role in the determination of both optimal tax policy and labour wedge. Judd-Chamley optimal zero capital tax result can still hold in the model without profits. The optimal labour wedge is zero in the long run. This results in welfare gains of all agents and there is no conflict of interests between agents. But the Benthamite government chooses to subsidise the capital income in the long run in the model with profits due to the presence of productive public investment. The resulting labour wedge is non-zero which generates welfare losses of workers despite welfare gains of capitalists. The government also faces a trade-off between efficiency and equity in this model.
    Keywords: household heterogeneity; equilibrium unemployment; optimal taxation; labour wedge
    JEL: E13 E22 E62
    Date: 2014–09
  3. By: Stylianos Asimakopoulos; James Malley; Konstantinos Angelopoulos
    Abstract: This paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt, capital-skill complementarity and endogenous skill acquisition under technology and public expenditure shocks. We fiÂ…nd that skilled and unskilled labour tax smoothing maintain quantitatively under externalities and exogenous shocks in skill acquisition, as well as when the relative skill supply is exogenously determined. We further Â…nd that the government Â…nds it optimal to reduce both the size of the wedge between the marginal rates of substitution and transformation in skill attainment in the long-run and the standard deviation of this wedge over the business cycle. This is achieved by subsidising skill creation and taxing both types of labour income.
    Keywords: skill premium, tax smoothing, optimal Â…scal policy
    Date: 2014

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