Equity Arguments Research Articles

On the Road to Incoherence: Congress, Economics and Taxes

Congress is frequently criticized for social engineering by means of tax provisions. Critics of tax incentives, or tax expenditures, base their objections on equity and economic arguments. This perspective views tax expenditures as an ill-advised deviation from what they view as the tax code's primary purpose of revenue raising. This Article argues that these critics are ignoring the existence of a long economic tradition of using tax penalties and incentives to address externalities that the market fails to price adequately. This economic tradition, which is also called Pigouvian taxation, has generated a significant body of literature demonstrating that taxes can be an optimal solution for correcting externalities where a large number of people are making use of public goods. This is not to say that tax expenditure analysis has no role to play in tax policy, but simply that the economic tradition of Pigouvian taxation also has an important role to play. Unfortunately, when it comes to tax legislation, Congress often ignores both tax expenditure and economic analysis. To illustrate this point, this Article uses as a case study a 1997 tax amendment that expanded the tax benefits accorded to employer-provided transportation. As a result, tax incentives are now generally available that exacerbate urban congestion and air pollution problems. Congress similarly ignored the economics associated with the employment relationship, especially the importance of employment taxes in shaping the behavior of both employers and employees, and as a result it failed to appreciate the likely result of its amendment - that employers would use these expanded tax benefits to reduce their share of employment taxes. What is most troubling about Congress's use of the tax code for social engineering is that Congress is clearly confused about the very nature of how taxes can be used to control externalities and is now using a tax subsidy when it should be using a tax penalty. Because no tax expenditure analysis is required for employment taxes, Congress also was unaware that this provision would result in significant revenue losses for Social Security and Medicare and ignored implications for individuals dependent on Social Security. This Article draws a number of lessons from Congress's use of taxes. Among other reforms, the Article suggests that Congress make intelligent use of Pigouvian taxation by considering first whether an incentive or a penalty is appropriate. Because of the looming importance of employment taxes for our nation's fiscal future, this Article also urges the establishment of a tax expenditure budget for employment taxes similar to that already mandated for provisions affecting income taxes.

Political Competition and Fiscal Equalisation

Most federations, including Australia, have systems of fiscal equalisation which transfer income between States. Economists have long studied the economic efficiency and equity arguments for and against such transfers. This paper concentrates instead on the political aspect; namely, it asks whether federal political parties wishing to maximise their expected votes at election time would ever support a system of equalisation, particularly one which mandates efficient transfers of the type studied by economists. The answer, found using a two-State model of a federation in which voters are mobile, is in the affirmative: the political process delivers an efficient and equitable system of equalisation. However, the result depends on certain assumptions. The implications of these assumptions are explored.

Intergenerational issues regarding nuclear power, nuclear waste, and nuclear weapons.

Nuclear power, nuclear waste, and nuclear weapons raise substantial public concern in many countries. While new support for nuclear power can be found in arguments concerning greenhouse gases and global warming, the long-term existence of radioactive waste has led to requirements for 10,000-year isolation. Some of the support for such requirements is based on intergenerational equity arguments. This, however, places a very high value on lives far in the future. An alternative is to use discounting, as is applied to other resource applications. Nuclear weapons, even though being dismantled by the major nations, are growing in number due to the increase in the number of countries possessing these weapons of mass destruction. This is an unfortunate legacy for future generations.

Global Change, Natural Disasters and Loss-sharing: Issues of Efficiency and Equity

Global change in the form of climate warming, demographic developments, land use and capital movements to vulnerable regions will likely contribute to the already increasing human and economic losses from natural disasters. As countries in both the developing and developed world contemplate increasing losses from natural disasters, and as the victims relate these losses to human culpability, questions of burden-sharing for preventing and absorbing human and financial losses are becoming increasingly topical. This paper provides an overview of two forms of state and market burden-sharing at the local and global levels: collective loss-sharing after a major disaster by the state or the international community and the pre-disaster transfer of risk through insurance and other hedging instruments. With the recent attention given to the role of the private sector for apportioning and preventing disaster losses, we examine the efficiency and equity arguments for both collective loss-sharing and private risk transfer. We give special attention to the potential for governments of poor countries to transfer their natural disaster risks to the insurance and reinsurance markets, and to the international capital markets with newly developing hedging instruments, such as catastrophe bonds. We suggest that, under certain conditions, subsidized risk transfer can be an efficient and equitable way for industrialized countries to assume partial responsibility for the increasing disaster losses in poor countries, in addition to their role in aiding the economies of these countries.

How strong is the case for targeting active labour market policies?

The article assembles efficiency and equity arguments for and against targeting the long‐term unemployed in active labour market policies (ALMP), and refers to evidence from applications to date. The theory and practices of ALMP differ somewhat between low and high unemployment countries. The approach taken in Sweden in the 1960s to 1980s is used to discuss low unemployment countries, and OECD analysis in the 1990s to represent theory for the high unemployment countries. Targeting the long‐term unemployed is specifically a policy for high unemployment countries, and depends particularly on effects on wage pressure. The article concludes by urging that equity arguments be considered as well as efficiency and by drawing attention to the form which targeting takes. Comments are made about Britain’s New Deal in relation to the form of targeting.

Zero prices, equity and natural areas

A policy of zero prices for entry to publicly provided parks and reserves treats people equally, but does not result in equitable outcomes. Entry to New Zealand parks and reserves is free, but usage of these areas is only weakly influenced by zero entry price. Travel costs and incomes are major determinants of usage of natural areas. All citizens of a country may receive benefits from the existence of parks and reserves, and the option to visit those areas. But visitors receive disproportionately more benefits than do non‐visitors, and can legitimately be asked to meet a greater share of the costs of these areas. Equity arguments do not provide a convincing basis for continuing with zero prices to users. Recent legislation recognises this argument and will push regional governments to identify beneficiaries of Regional Parks, and levy charges which ensure users meet a greater share of the costs of Regional Parks. Given the weakness of the equity case, alternative explanation must be sought for continued zero entry prices.

Outcomes-based resource allocation for indigenous health services: a model for Northern Australia?

Wide differentials continue to exist in mortality rates and other health outcomes between Aboriginal and non-Aboriginal Australians. In the Northern Territory (NT), where Aborigines make up 24% of the population, the all-causes age-adjusted Standardised Mortality Ratio for Aborigines compared to non-Aborigines has remained above 3 since the late 1970s, with significant regional variations. During 1995 an expenditure analysis was undertaken for primary health care (PHC) services in different regions of the NT and compared to mortality ratios. At the same time a method for needs-based funding was being developed which could replace the existing historical funding arrangements. In the first instance, the application of a simplified version of this Resource Allocation Formula (RAF) resulted in a significant shift of resources for new prevention program funding to regions of relatively high mortality and low per capita PHC expenditure. However, developing RAFs to redistribute at the margin within the NT is likely to generate further inequities between losing NT programs and counterparts in other states. If outcomes-based resource allocation is to be meaningful nationally, the reference point for the RAF should be national average PHC expenditure rather than existing state averages. There is a need for a combined approach to outcomes-based planning which takes into account both the equity arguments of resource allocation models and efficiency arguments to maximise health gains. Some of these arguments are explored in this paper.

An Investigation of Moral Suasion and Vertical Equity Arguments on Intended Taxpayer Noncompliance

A statewide telephone survey was used to obtain data on self‐reports of hypothetical prize income. One‐third of the subjects were read a moral argument, one‐third were read information on the level of taxes paid by the “wealthy,” and one‐third of the subjects were treated as the control group. Both the moral and the wealthy‐pay arguments increased compliance for some of the subjects. There was no apparent backlash effect from the moral argument as suggested by Tittle and Rowe (1973). The wealthy‐pay strategy was effective for taxpayers with tax balances due rather than for those receiving tax refunds. The study also provides evidence on how college education moderates the effects of tax balances due as well as evidence on how a moral argument can negate the noncompliance effects of tax balances due.

Generational Justice: The Marriage of Sustainability and Social Equity

In recent years, equity arguments have been used to undermine vital environmental proposals. This article uses three recent environmental issues—the excise on leaded petrol, the carbon tax and native forest logging—to argue that while equity and sustainability are closely linked: • the equity impacts of environmental policies are often not as severe as they seem; • packages of measures based on environmental policies can offset the negative social welfare impacts; and • the equity impacts of failing to act are likely to be severe. Poorer households tend to suffer more from environmental degradation than wealthier households. The case studies are used to argue that the poor of future generations will pay the price of failing to pursue strong environmental policies now. Greater effort must be put into developing policies that have a double dividend. Ecological tax reform packages are likely to be a major part of this.

The Role of Education and Training in the Economy

This paper is intended to provide a brief introduction to how economists assess the importance of education and training in the Australian economy and how the allocation of resources to education can be assessed. Included in the introduction are statistics illustrating the enormous impact of education and training on Australia's economy and a discussion of possible reasons individuals, employers, and governments allocate resources to education and training. Basic distinctions between compulsory and postcompulsory education, general and vocational education, preemployment education and employment-related training, and general and specific training are drawn in part 2. The following considerations in assessing governments' role in allocating resources to education and training are discussed in part 3: efficiency and equity arguments; funding and provision options open to governments; and the Australian government's role in the provision, finance, and regulation of education and training. Part 4, which is devoted to the problem of treating education and training as investments by using the human capital model, examines the following topics: stocks and flows; measures of human capital; key linkages; and rates of return. Part 5 describes a process for assessing the contribution made by education and training to economic performance. The document contains 48 references. (MN) ******************************************************************************** Reproductions supplied by EDRS are the best that can be made from the original document. ********************************************************************************

The Emerging Model for Salary Management in the Private Sector: Is it Relevant to Government?

The interest in new concepts in salary management is mushrooming in both the private and public sectors. After several decades of relying on essentially static practices, the private sector is moving rapidly toward a new model for designing and administering salary programs. The public sector has found that it is more difficult to introduce new program concepts but there is recognition that existing programs are not working. Despite the difficulties, the concern with program effectiveness makes it a logical hot-button for re-inventing government agendas. The purpose of this article is to review the emerging new model for salary management and to consider its viability for the public sector. Public and private salary programs rely on the same basic framework but the underlying philosophies differ in important ways. Although the programs incorporate the same components and share a good deal of the technical jargon, the day-to-day administration makes the reality of public and private programs very different. Perhaps the most important difference is the decision process that governs change in the private sector where business need -- the so-called bottom-line -- can be used to justify swift and possibly disruptive changes. This makes it possible to introduce new program concepts as soon as the chief executive agrees with the need for the proposed changes. Public and Private Pay Programs -- The Similarities and the Differences All wage and salary programs have their origins in the era of scientific management that is only now beginning to wane. The basic goal has been control. In theory there is virtually no flexibility; the program controls are intended to give program managers the to make all needed decisions using reliable information. Public and private programs share those tools as well as a common history and research efforts. The most notable exception is the public sector's reliance on classification systems. Practitioners in the private sector occasionally refer to job classes but classification systems such as those used in the federal GS program are effectively non-existent. Jobs in the private sector are informally categorized by job family but, aside from jobs covered under occasional collective bargaining agreements, few employers have procedures or administrative systems in place to help make these decisions. Private employers have had elaborate systems for job evaluation, although the underlying philosophy is significantly different than in government. A basic policy issue in the private sector is the balance between internal and external or market considerations. Unlike government, salary grades are rarely based solely on internal value. Many private wage and salary programs, particularly in small companies, are based solely on the premise that salaries need to be aligned with prevailing labor market pay levels. The importance of the labor market is a key difference between public and private employers. While market data are a consideration in the public sector, it is seldom that the need to pay competitively is the controlling rationale for decisions regarding salary range assignments. As corporations have become sensitive to costs over the past several years, they have begun to place more emphasis on comparative labor costs and on market analyses. Most large companies, however, do have an evaluation system that is intended to determine a job's internal value. Virtually all of these systems are based on a quantitative decision process, typically based on the point factor method. These systems are effectively the same in both private and public employers. Starting in the late 1970s the pay equity argument triggered renewed interest in job evaluation and this resulted in the development of new automated systems. Private employers gave limited lip-service to pay equity concerns but it's safe to say that few, if any, have adopted the concept as a corporate policy. …

Pay Equity and Wage Justice

Pay equity job evaluations remove some wage bias, but do not resolve class inequalities. It is "socially efficient" to require capital to meet a democratic standard of wage justice, which would require firms to continuously upgrade job values, eliminate unskilled work, reduce hours of work, and pay a high minimum wage. Requiring firms to upgrade and equalize job structures builds on the pay equity argument and addresses both discrimination and class issues.

Generational equity and measurement bias: Who is really poor?

One core contention of the generational equity argument is that elderly people are financially well-off. To support this argument, generational equity proponents compare poverty rates of elderly people to those of children in the United States demonstrating that elderly people enjoy a privileged position in terms of financial well-being as compared to other age groups. I argue that the measurement of poverty upon which this argument is based is grounded in faulty logic and incorrect assumptions. Therefore, the basis of this generational equity argument is invalid. I conclude that using poverty rates creates the impression of a conflict between children and elderly people drawing attention away from the continuing problem of discrimination against women and minorities.

Welfare dominance and the design of excise taxation in the Côte d'ivoire

Designing optimum excise taxes has been shown to require information, not easily obtained, about the nature of an economy's social welfare function. If instead of seeking the best excise tax system, policymakers ask what is a better excise tax system, it is possible to use the concept of marginal conditional welfare dominance and avoid the need for strong value judgements. An excise tax base is welfare dominant if virtually all plausible social welfare functions would approve relatively higher taxes on that base. Applying this concept to the Côte d'Ivoire we present an equity argument for greater reliance on electricity and telephone excises and indicate that administrative and efficiency considerations might also favor this choice.

An essay on the implications of university expansion in Kenya

Although Kenya may be the most extreme example, expansion of university education is widespread throughout Eastern and Southern Africa. This article examines the irresistible rising tide of populism as it reaches the ivory tower in Kenya. Economic, political, and equity arguments supporting and opposing expansion are outlined. The conclusions, although directed at Kenya, are broadly applicable to those African nations embarking upon a program of tertiary-level growth.

Implications of Introducing U.S. Withholding Taxes on Foreigners' Interest Income

This paper explores efficiency and equity issues related to the introduction of a withholding tax on foreigners' interest income from their investments in the U.S. Because of existing treaty obligations and tax-avoidance options, the effective tax rate of any practicable withholding tax is likely to be considerably below its statutory rate. A statutory 30 percent U.S. withholding tax on portfolio interest, if not accompanied by similar (retaliatory) tax measures introduced by foreign governments, appears to yield aggregate domestic welfare gains. The gains are attributable to U.S. financial market power stemming from the large share represented by the U.S. of world financial transactions and from the imperfect substitutability between U.S. and foreign securities in port-folios. Gains also derive from effects on domestic saving. The withholding tax leads to only a temporary improvement in the U.S. trade balance and in aggregate exports. The ultimate deterioration of the trade balance is closely related to effects of the tax on international interest flows. If foreign governments respond in kind to a U.S. withholding tax initiative, the combined effect is a decline in U.S. residents' aggregate welfare. Foreign retaliation enlarges the global efficiency losses associated with a new U.S. withholding tax. The equity arguments for the withholding tax are mixed. Restricting the application of the tax to investors from countries that already impose similar measures may have more justification on fairness grounds than applying the tax to all foreign investors. An attraction of the tax is its ability to discourage capital flight to the U.S. and related tax evasion; however, other policies with less serious efficiency costs might be equally effective in addressing tax evasion problems.

Protesting a perceived injustice: Sex discrimination and the restoration of equity

In this paper we propose a theoretical model that examines the relationship between resources and significant others in people's attempts to restore equity. Viewing the restoration of equity as a complex process, we integrate resource mobilization and equity arguments in order to better understand how people come to dispute and settle fair terms of exchange in allocative relationships. With individual-level data, we examine sex discrimination complaints and show that “protest reactions” against a perceived injustice are influenced by the level of resources a person controls. We find that the more resources a person controls, the better able she or he is in managing the protest and negotiation for equity. Further, resources also protect complainants from reprisals by the source of the inequity. These findings provide insight into the process by which people attempt to restore equity, and they suggest that the examination of real-life inequitable relations enhances our understanding of reactions to inequity.

Financing Confederation: Rejoinders

In their comment on the principles and practice of equalization Norrie, Percy and Wilson (1982) make several interesting points primarily concerning Chapter 3 of the Economic Council of Canada's Financing Confederation, but also on our own study (1982) and Bill C37. They correctly point out that the theoretical analysis argues for a net scheme while the Council's recommendations seem to accept a gross scheme. They note that the distinction between provincial resource revenues and other sources of revenue in the choice between the narrow and broad views of horizontal equity involves a judgment about the interpretation of the Constitution that not all would accept. As well, they point out the defects of the five-province average standard for equalization for dealing with resource revenues. Their main criticism, apparently subscribed to by Vanderkamp (1982:294), is that 'the theoretical section exaggerates the degree of harmony between equity and efficiency criteria as rationale for equalization transfers, and almost certainly overstates the amount of such payments that are required' (Norrie et al., 1982:290). Their argument is based on the contention that the Council's recommendations for equalization on equity and efficiency grounds are only valid in the cases of zero migration and perfect migration respectively, and that with imperfect migration, full equalization is not called for on either ground (Ibid.:290-1). We would like to argue that imperfect migration is a red herring which has no effect on the case for equalization. Given the judgments explicitly made by the Council and ourselves, full equalization is warranted on both equity and efficiency grounds in all the circumstances considered by Norrie, Percy and Wilson. The efficiency arguments for some form of equalization can be shown most easily using the simple diagram Figure 1 depicting the market for homogeneous labour in a two region federation. The curves MPA and MPB refer to the marginal products of labour in A and B respectively, while m is the cost of migration, assumed to rise with migration. The initial allocation of labour endowments in the federation is L. Labour migrates from B to A until MPA = MPB + m shown as the allocation Lo. This is an efficient allocation of labour. Suppose now some net fiscal benefits are generated by the actions of province A, say, due to the collection of resource rents. In the diagram, these net fiscal benefits are denoted R. The migration equilibrium in the presence of the net fiscal benefits is shown as L1, and is obviously inefficient. A little thought will convince the reader that only if net fiscal benefits are equalized over regions will the migration equilibrium be efficient. Algebraically, labour will migrate until MPA + RA m = MPB + RB. Only if by transfers RA = RB will this result in an equilibrium at the optimum Lo where MPA m = MPB. Thus, efficiency requires full equalization in the presence of migration costs. The equity argument for equalization in the presence of migration costs is somewhat more subtle. Broad-based horizontal equity, the notion which we apply here following Norrie, Percy and Wilson, requires that individuals identical in the absence of net fiscal benefits remain identical in their presence. The argument requires that there be more than one type of worker. Suppose that there are two types of workers and that, in the absence of net fiscal

Imputation Systems of Corporation Tax within the EEC

Publisher Summary This chapter discusses the imputation systems of corporation tax within the EEC. The introduction of an imputation system in the United Kingdom in 1973 seems to have been the result of three main factors. There was the need to harmonies practice within the EEC. There was also an equity argument against the economic double taxation of dividends. The chapter presents a comparison of incorporated and unincorporated businesses. It has not been possible to establish whether the imputation system in the UK would lead to greater dividends because of such complicating factors since 1973 as high inflation and dividend restrictions. It is not at all clear that it is possible for investors to tell which companies will make the best use of investment funds.

Equity, efficiency, and discounting : The reasons for discounting intergenerational effects

Confusion between the ethical norm of intergenerational equity and the practical technique of discounting only obscures the basic issues of efficiency and equity. The author distinguishes between the discounting approach and the equity argument, and explains their essentially complementary roles in long-term investment decisions. He argues that the discounting method is an important tool in the achievement of intergenerational equity since it can determine the amount of compensation to be paid to future generations, a sum which by definition will compensate them for the damage our action has caused.