Choice Of Tax Base Research Articles

Optimal Tax Design: Choice of Tax Base and Rate Structure

Optimal Tax Design: Choice of Tax Base and Rate Structure

Policy Design and the Politics of City Revenue: Evidence from California Municipal Ballot Measures

Residents of the United States rely on municipal governments to deliver important public goods but are often reluctant to pay for those goods. Can tax policy design affect voters’ propensity to say yes to local taxes? We answer this question by analyzing a new database of 929 tax increases of heterogeneous design that were proposed to California voters from 1996 to 2010. We find that voters’ willingness to raise a municipal tax varies with the choice of tax base, as well as with such policy design features as its timing and its symbolic links to particular purposes. The political limits on city revenue may vary substantially depending on how a tax is designed, and theories that assume otherwise—including several classic models of urban politics—may exaggerate the degree to which municipal revenues are constrained.

The choice of tax base by local authorities: voter preferences, special interest groups, and tax base diversification

We analyze local jurisdictions’ behaviors when selecting the type of tax levied in support of local services. Our analysis focuses on taxes that must be approved by voters. Taxes differ in their incidence; thus, even when proposed revenue amounts are held constant, voting patterns and the aggregate level of voter support differ among potential revenue sources. We use a general model of political cost minimization to derive three hypotheses about local tax authorities’ behaviors. Using Ohio school district data, we find that the expected probability of passage is a highly important determinant of tax choice. Further, there is evidence that special interest groups wield influence greater than their direct impact on voting behavior, and evidence that tax authorities attempt to diversify their tax structure.

Risky Assets and the Choice of Tax Base

Using a two-period model in which income is earned in the first period and saving can be invested in a risky asset, the authors explore the implications of the wealth tax and the consumption tax approaches for both the government and the wage earner. Settings under which decisions are made through Marshallian utility functions and settings under which decisions are made through von Neumann-Morgenstern risk preference functions are clarified. This is an issue that has suffered from benign neglect in this literature. It is shown that the implications of uncertainty for tax policy are much greater than has hitherto been implied.

Taxation in an intertemporal general equilibrium model of a small open economy

This paper presents a computable general equilibrium model of a small open economy, similar to the Auerbach-Kotlikoff model. Domestic and foreign goods are imperfect substitutes, whereas domestic and foreign assets are perfectly substitutable. We investigate the effects of partial switches in the choice of tax base from capital or wage income taxation to consumption taxation. It is found that reductions in capital income tax rates may lead to less capital accumulation at home, even though these reductions are welfare improving. A reduction of corporate income taxes gives best results in this respect. Terms of trade effects generally dominate the efficiency gains of a switch of tax base.

Choice of tax base under uncertainty: Consumption or income?

This paper compares the efficiency of alternative tax bases in the context of a two-period life-cycle model. Should the objective of tax policy be to encourage social risk-taking, savings, or to maximize welfare, the consumption tax is a clear front runner. This tax also leads to greater expected revenue than an equal expected utility income tax. Further, equal utility (or revenue) rates of consumption tax are practically independent of the degree of risk-aversion, and revenue fluctuations between alternative states of nature turn out to be small.

Costs of Collective Decisions, Choice of Tax Base, and Median Voter Equilibrium

This note examines the relationship between public expenditure growth and tax base elasticity in the context of the median voter model. If the revenue elasticity of the tax base and the median voter's income elasticity of demand for public services are not identical, the automatic increase in public revenue resulting from an increase in voter income will not match the median voter's increase in demand for public service expenditures. If adjusting tax rates is costly, the short-run rate of growth ofpublic expenditures will be biased in the direction of the automatic growth in tax revenue rather than being tied directly to changes in the median voter's demand for public services. The welfare loss occasioned by these positive decision-making costs can be reduced by choosing that tax base for which revenue elasticity most closely corresponds to income elasticity and also by evaluating tax rates in a multiperiod context at the time they are imposed.