nep-pub New Economics Papers
on Public Finance
Issue of 2016‒09‒25
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium By Sachs, Dominik; Tsyvinski, Aleh; Werquin, Nicolas
  2. Optimal Redistribution with a Shadow Economy By Doligalski, Pawel; Rojas, Luis E.
  3. Taxation, bubbles and endogenous growth By Stefano Bosi; Ngoc-Sang Pham
  4. Taxing Pensions By CREMER, Helmuth; PESTIEAU, Pierre
  5. Taxing Royalty Payments By Juranek, Steffen; Schindler, Dirk; Schjelderup, Guttorm

  1. By: Sachs, Dominik; Tsyvinski, Aleh; Werquin, Nicolas
    Abstract: We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.
    Keywords: General Equilibrium; optimal taxation; Tax Incidence; Tax Reforms
    JEL: H21 H22
    Date: 2016–09
  2. By: Doligalski, Pawel; Rojas, Luis E.
    Abstract: We examine the constrained efficient allocations in the Mirrlees (1971) model with an informal sector. There are two labor markets: formal and informal. The planner observes only income from the formal market. We show that the shadow economy can be welfare improving through two channels. It can be used as a shelter against tax distortions, raising the efficiency of labor supply, and as a screening device, benefiting redistribution. We calibrate the model to Colombia, where 58% of workers are employed informally. The optimal share of shadow workers is close to 22% for the Rawlsian planner and less than 1% for the Utilitarian planner. The optimal tax schedule is very different then the one implied by the Mirrlees (1971) model without the informal sector.
    Keywords: Shadow Economy, Informal Labor Market, Income Taxation, Redistribution
    JEL: H21 H26 J46
    Date: 2016
  3. By: Stefano Bosi (EPEE (University of Evry)); Ngoc-Sang Pham (LEM (University of Lille 3) and EPEE (University of Evry))
    Abstract: We study the interplay between taxation, bubble formation and eco- nomic growth. A rational bubble may be beneficial when growth is fu- elled by public investment (or R&D externalities) and the government levies taxes on bubble returns to finance this investment. Our main result challenges the conventional view about the negative effect of bubbles in endogenous growth (Grossman and Yanagawa, 1993).
    Keywords: taxation on financial revenue, public R&D, endogenous growth
    JEL: E44 H23 O30
    Date: 2016
  4. By: CREMER, Helmuth; PESTIEAU, Pierre (Université catholique de Louvain, CORE, Belgium)
    Abstract: There exists a wide variety of tax treatments of pensions across the world. And the reasons for such a range of regimes are not clear. This note reviews the general principles of pension taxes and analyses the theoretical foundations of why pension incomes ought to be taxed specifically. To do this, one has to distinguish between public and private pensions. The design of public pensions cannot be separated from the one of taxation. Regarding private pensions, the key issue is whether or not pension saving ought to be treated differently from other forms of saving.
    Keywords: private pensions, deferred tax, social security, retirement
    Date: 2016–03–01
  5. By: Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics); Schindler, Dirk (Dept. of Accounting, Auditing and Law, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: The digital economy is characterized by the use of intellectual property such as software, patents and trademarks. The pricing of such intangibles is widely used to shift profits to low-tax countries. We analyze the role of a source tax on royalty payments for abusive transfer pricing, and optimal tax policy. First, we show that mispricing of royalty payments does not affect investment behavior by multinationals. Second, it is in the vast majority of cases not optimal for a government to set the source tax equal to the corporate tax rate. The reason is that shutting down abusive transfer pricing activities needs to be traded off against mitigating the corporate tax distortion in capital investment. The latter can be achieved by some tax deductibility of royalty payments. If the true arm's length transfer price equals zero or for special corporate tax systems that treat debt and equity alike (i.e., for ACE and CBIT), it will be optimal to equate both tax rates.
    Keywords: Royalty taxation; intellectual property; multinationals; profit shifting
    JEL: F23 H21 H25
    Date: 2016–09–16

This nep-pub issue is ©2016 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.