Income Tax Financing Research Articles

Government Expenditure Financing, Growth, and Factor Intensity

<span lang="EN-US">By shedding light on the factor intensity, this paper incorporates the Romer (1986)-type knowledge spillover technology into the Uzawa (1961, 1963) two-sector model of consumption and investment goods and studies the effect of the ratio of government expenditure to total output on the economic growth rate under three types of tax financing schemes: lump-sum tax financing, income tax financing, and consumption tax financing. We find that a rise in government expenditure with lump-sum tax financing has an ambiguous effect on the balanced growth rate depending on the factor intensity between the sectors. The balanced growth rate decreases (increases) with a rise in government spending if the consumption (investment) goods sector is capital-intensive. Moreover, the result of consumption tax financing is equivalent to lump-sum tax financing, while an increase in the government expenditure with income tax financing reduces the balanced growth rate. Our two-sector model with lump-sum tax or consumption tax financing seems to be able to provide a channel through which to explain the mixed empirical findings.</span>

PUBLIC INVESTMENT FINANCED BY CONSUMPTION TAX IN AN AGING SOCIETY

Earlier papers have examined endogenous growth models including public investment financed by an income tax. However, public capital with such financing has not been reported. Aging societies are developing rapidly in economically developed countries. Consumption taxes to finance government expenditures are attractive to alleviate intergenerational inequality. In this paper, we demonstrate that, for public investment financing, a consumption tax is better than an income tax for income growth. If a future generation’s utility is not discounted greatly in social welfare, a consumption tax is superior. A government-set income growth rate target makes income tax financing desirable by providing more social welfare.

Government Expenditure Financing in a Two‐Sector Cash‐In‐Advance Model of Endogenous Growth

AbstractWe show that an expansion in the government size could be desirable from the viewpoint of the economy's long‐run growth, wherein factor intensity between the sectors, the mode of public spending financing, and the form of the cash‐in‐advance (CIA) constraint are crucial. We also show that when real balances are required only for consumption purchases, money financing is equivalent to consumption tax financing, but is not equivalent to income tax financing. If both consumption and gross investment are liquidity‐constrained, then the three financing methods are mutually not equivalent. The optimal financing scheme has the following features: (1) when the CIA constraint applies only to consumption purchases, any combination of the money growth rate and the consumption tax rate that satisfies the government budget constraint constitutes an optimal financing mix; (2) when the CIA constraint applies to both consumption and investment purchases, consumption tax financing only is optimal.

Can productive government spending be a source of equilibrium indeterminacy?

This paper presents an examination of the interaction between indeterminacy and productive government spending financed by taxes in a one-sector growth model. In the paper, we show that the possibility of indeterminacy is positively affected by dependence on income tax financing and is negatively affected by consumption tax financing. Under balanced budget rules, a key determinant for indeterminacy is a revenue source for providing public services (i.e. income tax financing) rather than the presence of productive government spending.

PUBLIC CAPITAL, TAXATION AND ENDOGENOUS GROWTH IN A FINITE HORIZONS MODEL

ABSTRACTThis paper presents development of an endogenously growing finite horizons model with public capital, and investigates macroeconomic effects of fiscal policy and a change in life expectancy. Specifically regarding novel results, a growth‐maximizing income tax rate exists that is less than the elasticity of public capital to output. In addition, in the model with income tax financing, there might exist an inverted‐U‐shaped relationship between life expectancy and growth, which is consistent with some empirical evidence. In this paper, we elucidate the interaction among public capital accumulation, taxes, growth, welfare and life expectancy.

Government Budgetary Policies, Economic Growth, and Currency Substitution in a Small Open Economy

This paper compares the macroeconomic consequences of alternative government budgetary policies in a small open economy where agents transact in both domestic and foreign currencies. An endogenous growth model is used to rank the effects of income-tax-financed and inflation-tax-financed government expenditures on the economy's growth and inflation rates. Currency substitution provides an avenue for inflation-tax evasion and affects the rankings of the two modes of government finance. The analysis reveals that an increase in the size of government reduces the growth rate of the economy regardless of the government's budgetary policy. Inflation taxes hinder growth more than income taxes. Income-tax financing is also the preferred policy in terms of its effect on the economy's inflation rate. Under the growth-maximizing tax mix, the government relies on both forms of finance but receives most of its revenue from income taxes.

THE OPTIMAL SUPPLY OF PUBLIC GOODS AND THE DISTORTIONARY COST OF TAXATION: COMMENT

Louis Kaplow argues in his recent paper that there are a wide variety of situations in which the income tax financing of a public good is nondistortionary. Specifically, this occurs when the additional tax liability of each person equals that person's additional benefit from the public good. We show that the income tax does distort in exactly the cases where Kaplow argues that there is no distortion, at least in the conventional sense of the term "distort." Specifically, we show that taxpayers will be better off, and will prefer a larger quantity of the public good, if lump sum taxes are used to finance the public good rather than an increase in the income tax rate. This conclusion holds for all the specifications (regarding the nature of the public good) discussed by Kaplow.

Privatizing U.S. Social Security: Some Possible Effects on Intergenerational Equity and the Economy

In the early 1980s, when Chile first privatized its social security system, few observers could have predicted that its action would precipitate the worldwide interest in privatization that prevails today. In large part, the current interest grows out of a belief that privatizing social security can enhance national economic growth and lead to a higher standard of living for workers and retirees. Indeed, many analysts have attributed Chile’s current economic success to social security privatization. Whether that is actually the case will no doubt be a subject for study by economic historians for years to come. In the meantime, a question that many researchers and others are asking is “Will privatization yield the expected benefits in the United States?” Among the researchers who have studied this question are Seidman (1986) and Feldstein (1995), who use partial equilibrium frameworks, and Arrau (1990), Arrau and Schmidt-Hebel (1993), Raffelhuschen (1993), and Huang, Imrohoroglu, and Sargent (1997), who use general equilibrium frameworks. This article uses simulations in a stylized model—the Auerbach-Kotlikoff Dynamic Life Cycle model—to explore some possible economic outcomes of privatizing Social Security in the United States: first, the potential impact on the macro economy; second, how different generations may be affected (in particular, whether privatization will enhance or undermine intragenerational equity); and, third, some efficiency gains that might arise from privatization. The parameters in this model (hereinafter referred to as the A-K model) closely parallel those of U.S. economic conditions and fiscal policies. In addition, the model has more detailed equilibrium frameworks than those in the other models cited above. Previously used in a number of simulation studies (see Kotlikoff, 1996 and 1998, and Kotlikoff et al., 1997 and 1998), the A-K model has recently been enhanced to include intragenerational heterogeneity, kinked budget constraints, and a more realistic formulation of income taxation. All the variations of the A-K model comprise three basic elements: (1) workers are required to contribute to private retirement accounts, (2) social security benefits are awarded to those who are workers and retirees during the transition in accordance with the benefits they have accrued before the transition, and (3) these transitional benefits are paid for by means of a wage tax, an income tax, a consumption tax, or a combination of income taxes and deficit financing. Simulations in the A-K model indicate that the long-run effects on the macro economy differ substantially from the short-run effects, depending on how the transition is financed. Because consumption-tax financing produces much more rapid economic gains than either wageor income-tax financing (see Kotlikoff et al., 1997 and 1998), I discuss only the consumption-tax simulation in this article.

International Effects of Government Expenditure in Interdependent Economies

A dynamic analysis of the international transmission of government expenditure shocks under alternative methods of finance is presented. The benchmark case of lump-sum tax financing yields an expansion in both the short-run and the long-run levels of domestic activity, while crowding out domestic consumption. Activity abroad declines in the short run, and while it is stimulated during the transition, long-run activity abroad also declines. With capital income tax financing, the accompanying distortion outweighs the direct expenditure effects, so that all these responses are reversed. Financing with a tax on labour produces ambiguous responses. The welfare implications of these policies are also examined.

Government Expenditure Financing in an Endogenous Growth Model: A Comparison

This paper develops a generalized cash-in-advance model of endogenous growth to assess the relative merits of money and income-tax financing of a constant share of government expenditure in GNP. The authors find that money financing (seigniorage) leads to higher growth and inflation rates, pointing out to a trade-off between growth and inflation. Nevertheless, they also find that the financing policy that maximizes welfare is, in general, a mix of the two methods, with the weights depending crucially on the fraction of investment purchases that are subject to the cash-in-advance constraint. Copyright 1995 by Ohio State University Press.

Views on transit tax financing in the U.S.

Although much has been written about the economics of transit tax financing, public views and opinions toward alternative tax sources have received comparatively short shrift. This paper examines the attitudes of transit managers as well as other political groups toward various tax sources available for financing transit services in the U.S.A. From a survey of 129 transit officials, state fuel and vehicle registration taxes are found to be the overwhelming favorites. Administrators for large transit properties generally also favor federal income tax financing of transit, while those for smaller agencies seem to rate sales tax revenues relatively highly. Several other studies have likewise shown sales taxes to be preferred by transit officials. With the planned phase-out of federal operating assistance, it is becoming increasingly imperative that authorizing legislation be enacted allowing jurisdictions to dedicate a range of local revenue sources to transit. While perspectives on transit tax financing were found to vary somewhat among vested interests, in general there seems to be more agreement than dissension on which tax sources should be used.