nep-pub New Economics Papers
on Public Finance
Issue of 2022‒04‒11
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Fiscal policy in the COVID-19 era By Chris Murphy
  2. Optimal Nonlinear Savings Taxation By Brendon, C.
  3. Optimal Commodity Taxation Under Non-linear Income Taxation By Kevin Spiritus
  4. Pareto-Improving Optimal Capital and Labor Taxes By Katharina Greulich; Sarolta Laczó; Albert Marcet
  5. The Future of Taxation in changing labour markets By Michael Christl; Ilias Livanos; Andrea Papini; Alberto Tumino

  1. By: Chris Murphy
    Abstract: This paper analyses the COVID recession and the large fiscal policy response by modelling three scenarios using a macro-econometric model. Scenario comparisons show that the recession mainly arose from restrictions on certain consumer services to limit the spread of COVID-19. The large fiscal response to compensate for the income losses in the restricted industries meant that unemployment was 2 to 3 percentage points lower in 2021-22 and 2022-23 than otherwise would have been the case. However, there was over-compensation: for every $1 of income the private sector lost due to the restrictions, fiscal policy provided $2 of compensation. With the lifting of restrictions, the economy recovered, but the aftereffects of over-compensation generate excess demand driving inflation to a forecast peak of about 6 per cent in 2022 and 2023. Overcompensation can also have disincentive effects, as seen in the three forms of overcompensation in the JobKeeper program that led the fiscal response. The primary lesson for future pandemics is that fiscal policy should compensate, but not overcompensate, for income losses from health restrictions, both in aggregate and at the program level. The secondary lesson is that monetary policy needs to take more account of the stimulus already provided by the fiscal response, so that interest rates do not remain very low for too long.
    Keywords: fiscal policy, COVID, econometric modelling, macroeconomic outlook, JobKeeper
    JEL: E37 E62 E63 H32 H68
    Date: 2022–03
  2. By: Brendon, C.
    Abstract: This paper analyses the design of optimal nonlinear savings taxation, in a multi-period consumption-savings economy where consumers face persistent, uninsurable shocks to the marginal value that they place on consuming. Its main contributions are: (a) to show that shocks of this kind generically justify positive marginal savings taxes, and (b) to characterise these taxes by reference to a limited number of sufficient statistics. The method for obtaining this characterisation is generalisable, and provides a roadmap for reconnecting ‘Mirrleesian’ and ‘sufficient statistics’ approaches to dynamic taxation. Intuitively, dynamic asymmetric information problems imply significant restrictions on intertemporal consumption elasticities. These restrictions keep sufficient statistics representations manageable, despite the multi-dimensional choice setting.
    Keywords: Nonlinear Taxation, Sufficient Statistics, Mirrleesian Taxation, New Dynamic Public Finance
    JEL: D82 E21 E61 H21 H24 H30
    Date: 2022–03–25
  3. By: Kevin Spiritus (Erasmus University Rotterdam)
    Abstract: I characterize the optimal linear commodity taxes when households differ in multiple characteristics, in presence of an optimal non-linear tax schedule on the households’ labour incomes. The optimal distortions caused by a linear commodity tax are larger if, conditional on labour income, more deserving in- dividuals consume more of that commodity. This is the case for merit goods, or if the government otherwise seeks to compensate individuals who consume larger quantities of that commodity. Furthermore, the government wishes to tax commodities at different rates to the extent that doing so reduces the dis- tortions caused by the labour income tax. This is the case when individuals with different incomes have different preferences, or when individuals who sup- ply different quantities of labour have different consumption patterns. I extend these findings to the case where households earn multiple incomes.
    Keywords: optimal commodity taxation, multidimensional taxation
    JEL: H21 H24
    Date: 2022–02–27
  4. By: Katharina Greulich; Sarolta Laczó; Albert Marcet
    Abstract: We study optimal Pareto-improving fiscal policy in a model where agents are heterogeneous in their labor productivity and wealth and markets are complete. We first argue that recent results that find positive optimal long-run capital taxes in standard models obtain only if the government is allowed to immiserate the economy or if the government would prefer to waste consumption. Excluding these possibilities the Chamley-Judd result reemerges. We find that the long-run optimal tax mix is the opposite of theci shortand medium-run. For a Pareto improvement the length of the transition is very long, more so for policies that benefit the poor. Therefore the traditional focus on long-run optimal taxes is unwarranted. An initial labor tax cut causes early deficits leading to a positive level of government debt in the long run. Welfare weights need to be found endogenously for a Pareto improvement, a Benthamite policy that weighs equally all agents is often not Pareto improving. The optimal fiscal policy is time-consistent if reoptimization requires consensus and heterogeneity is high. We address the sufficiency of first-order conditions for the Ramsey optimum and provide a solution algorithm.
    Keywords: fiscal policy, factor taxation, Pareto-improving tax reform, redistribution
    JEL: E62 H21
    Date: 2022–01
  5. By: Michael Christl (European Commission - JRC); Ilias Livanos (European Centre for the Development of Vocational Training (CEDEFOP)); Andrea Papini (European Commission - JRC); Alberto Tumino (European Commission - JRC)
    Abstract: This paper provides a first assessment of the fiscal and distributional consequences of the ongoing structural changes in the labour markets of EU Member States, mostly driven by technological progress and ageing. Cedefop 2020 Skill forecasts, EUROSTAT population projections and the forecast on pension expenditures from the 2021 Ageing Report depict a scenario of an ageing population, an inverted U-shaped unemployment trend and potentially polarising labour markets, the latter mostly driven by a surge in high-skill occupations. This analysis makes use of the microsimulation model EUROMOD and reweighting techniques to analyse the fiscal and distributional impacts of these trends, given the current tax-benefit policies. The results suggest that the macro trends will increase pressure on government budgets. The analysis also shows evidence of the capacity of the current tax-benefit systems to counterbalance the increases in income inequality and poverty risks triggered by the expected future labour markets developments.
    Keywords: income distribution, budget, deficit, job polarisation, population ageing
    JEL: J11 J21 H68
    Date: 2022–03

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