Income Tax Model Research Articles

Social versus individual work preferences: implications for optimal linear income taxation

We extend the standard optimal linear income taxation model to allow for differences in social and individual work preferences while still maintaining the assumption that individuals are rational. The theoretical and simulation analyses show that when the government places a higher social weight on work than do individuals, the optimal marginal income tax rate (MIT) becomes lower. This implies lower revenue, income guarantee, and overall progressivity. The case for lower MIT is reinforced when the government places a relatively higher weight on work for low earners. Combining our analysis with that of An and Coady (2022), we, on the one hand, agree with previous studies that the optimal nonlinear income tax schedule would be close to the optimal linear one but, on the other, show that the degree of closeness would depend on preference differences. Our work contributes to the burgeoning field of non-welfarist economics.

Who should bear the burden of COVID-19 related fiscal pressure? An optimal income taxation perspective

The COVID-19 pandemic has led to an increase in public debt in most countries, and the Ukraine war is likely to have similar effects. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

Optimal income taxation under monopolistic competition

This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (Rev Econ Stud 38:175–208, 1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that quantity and variety distortions resulting from the market structure require adjustments to income tax policy, which also needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that in policy design the failure to account for the market structure results in a welfare loss of 1.77%. Motivated by practical cases, we study a policy regime that is solely based on income taxation. We show that departures from the social optimum can be compensated by lower and less regressive income taxes and a smaller government compared to the regime with income and commodity taxes. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.

A Consumed Income World- The Low Income and Prospects for Simplification- Replies to Professors Fleming and Yin

As chair of the Committee on Tax Structure and Simplification of the Section of Taxation of the American Bar Association, I invited Professors Fleming and Yin to lead a discussion with members of the Committee on the effects of various proposed consumed income tax models. Splendid scholars as they are, each converted his informal remarks into a published article.Meanwhile, the airwaves have been surfeited with talk shows, interviews, and panel discussions dealing ad nauseam with flat, and flatter, taxes, a consumed income tax, a national sales tax, and various proposals for taxation of business income. The general obfuscation of important and critical issues often seems intentionally deliberate, and in any case, however presented, does little to inform the public. Of all the issues we have on our national platter-abortion, gun control, educational policy, crime in the streets-taxation is the most emotionally supercharged because it affects us all. We all pay taxes, direct and indirect; taxes pervade and permeate our lives. Why can we not have clear and direct demonstrations of what various proposals would accomplish? Some years ago, Louis Eisenstein wrote that the problem is not that the American people do not understand the tax system; rather, the problem is that they may come to understand it too well.

Two-parameter model of optimization of the progressive taxation system and its applicability

The work aims to develop a model of income taxation that allows strengthening the fiscal effect of personal income tax and reducing the differentiation of income levels of different segments of the population, as well as assessing the impact of the proposed model on social inequality in Russia. To achieve this goal, a special two-parameter model of progressive income tax was developed, reflecting the result of studying the features of modern Russian taxation in the context of personal income tax. The key advantage of the developed tax model is the ability to assess social differentiation (by income category) in a pairwise subdecile breakdown, which allows the state to conduct a more balanced policy concerning each of the income groups participating in the study, which can be expressed, for example, in granting special tax preferences to decile groups that need it.

Оптимальное функционирование субъектов при кусочно-линейном налогообложении

We study analytical properties of the optimal income taxation model. In this model we consider the maximization of utility of an agent of the given type. The real meaning of the utility is the net profit of the legal entity. The mathematical consideration of the taxation optimization uses methods of probability theory, functional analysis and optimal control. The totality of all agents in the economy is represented by the probability space of their types. Optimal income taxation differs from commodity taxation, another branch of the optimal tax theory. Actual taxes are commonly linear or segmented, which naturally suggests us to consider such cases in this research. To be more precise, we describe the general piecewise linear taxation model with increasing linear coefficients. The latter is necessary for the tax function to be convex. An explicit description of optimal functioning of agents depending on their types is obtained. In particular, we consider optimal labour effort and optimal utility

A Fiscal Policy Foresight Tax Model, Shadow Economy Reduction, and E-Payment Institutionalization as a Result of Knowledge Management

Foresight is the key for the economy, the business environment, and by extension society and politics to face various risks under conditions of uncertainty, which is becoming the norm as we progress through the 21st century. This paper proposes a wealth-based income tax model with an obligatory electronic transaction legal framework to advance fiscal knowledge management in Greek government. The research was conducted using an online questionnaire that was distributed to Greek tax payers via the snowball method. Linear regression was used to examine the associations between the variables. The research results provide insight into the factors driving the enhancement of tax revenue collection via artificial intelligence software after the widespread adoption of e-transactions. A fiscal tax e-payment reform policy based on an artificially intelligent tax foresight model succeeds in reducing income disparities caused by overtaxing honest taxpayers, thereby shrinking the shadow economy. With the widespread adoption of e-payments and complete digitization of financial transactions, the results of this study can serve as a foundation for the advancement of fiscal knowledge management and compliance with tax behavior. This study emphasizes the importance of planning ahead for taxes and coordinating information in order to reform fiscal policy for the better.

Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness—for the purposes of policymaking and evaluation—is to design policy that takes these ranges into account. We modify the standard optimal income tax model to include the policymaker’s subjective uncertainty over parameter values, and we characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists’ beliefs, we compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Our results suggest that robust optimal marginal tax rates are typically more progressive than in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

ПРОБЛЕМЫ ПОРЯДКА ОПРЕДЕЛЕНИЯ СТАТУСА НАЛОГОВОГО РЕЗИДЕНТА

Personal income tax (PIT) is one of the most important tax systems of the Russian Federation. Long-term application of the current personal income tax model shows that the design of this tax is far from perfect. This tax is characterized by both unworked structural elements and clearly outdated parameters, which quite obviously limit the use of this tax in the social policy of the state. Speaking about constructive problems, first of all, it should be noted that the mechanism for determining the status of a tax resident of the Russian Federation for an individual is not developed. Meanwhile, this point in the taxation of individuals is very important, since it is this status that determines the tax rate at which the income of an individual will be taxed. Accordingly, this article is devoted to a discussion of this problem of personal income tax and proposals for their elimination.

Progressive income tax and calculation of the scale of progression based on the software product

In view of the low income level of a substantial part of the population in Russia and Kazakhstan, pronounced differentiation by income and social stratification, it is appropriate to introduce progressive taxation for individuals as required by the laws of economic development, despite the existing political imperative that determines the economic course. The article provides mathematical justification of the quantitative values of progressive scale based on the authorial software product of the model of optimal income tax for individuals that allows to accurately calculate the progressive rates considering various factors. The object of this research is the system of taxation of individuals; while the subject is the methods of quantitative determination of the boundaries of taxation of individuals with different income, consequences for the budget and population. The research employs the methods of comparison, generalization, statistical and economic-mathematical methods were used. The development of software product of the model of progressive income tax requires a particular method of mathematical substantiation of quantitative values, precision and convenience of economic-mathematical calculations. The authors developed the software product for personal income taxation based on the methodological provisions proposed by O. V. Kalinina. Such product allows calculating progressive rates of personal income tax, taking into consideration various factors. The conclusion is made that the transition from a flat to a progressive scale characterizes the social nature of redistribution of tax burden among population. Moreover, it would increase revenues into the state budget.

Optimal Income Taxation Under Monopolistic Competition

This paper is concerned with cross-dependencies between endogenous market structure and tax policy. We extend the Mirrlees (1971) model of income taxation with a monopolistic competition framework with general additively separable consumer preferences. We show that price and variety distortions resulting from the market structure imply that income tax policy needs to be complemented with commodity or firm taxation to achieve the constrained social optimum. We calibrate the model and find that, when choosing optimal tax policy, the failure to account for the market structure results in a welfare loss of 1:77 percent. Motivated by practical cases, we study a policy regime that is solely based on income taxation. Under this policy regime, departures from the social optimum can be compensated by lower and less regressive income taxes than those obtained under the regime with all forms of taxation. We also examine the role of consumer preferences for policy outcomes and show that it is substantially amplified by an endogenous market structure.

FISCAL AND SOCIAL DETERMINANTS OF PERSONAL INCOME TAXATION

Introduction. Direct taxes are an important financial regulator of socio-economic processes, they are one of the most important sources of budgeting and an essential tool of state regulation. The personal income tax is the main tax through which social policy is implemented in the developed countries of the world. The advantages of this tax include its social justice and fiscal efficiency, as it is able to make the level of taxation directly dependent on the amount of income of taxpayers. In addition, progressive tax rates and benefits can reduce the tax burden on the poor and increase it on high-income earners. The purpose of the article is to considerate the theoretical and practical aspects of administration of the personal income tax in the conditions of reforming of fiscal policy of Ukraine, systematization of directions of improvement of collecting of the personal income tax to local and state budgets. Methods. Methods of dialectical analysis and synthesis, deduction, induction logical generalization, comparison and formalization are used in the article. Results. The article is devoted to the study of the essence and role of personal income tax administration. Peculiarities of citizens’ income formation as an object of taxation are considered. Monitoring and analysis of indicators of personal income tax to local and state budgets was carried out. The growth rates of nominal revenues of personal income tax and military duty, real and nominal wages are studied. It was found that the main factors reducing the level of fiscal efficiency of personal income tax in Ukraine are the shadowing of incomes and the outflow of labor, including skilled personnel. Ukraine’s tax policy for the last five years is fiscally oriented and does not take into account the social aspect of personal income taxation. As a result of the research, the directions of increasing the efficiency of personal income taxation in Ukraine based on foreign experience are systematized. Prospects. The current model of personal income tax does not sufficiently perform a socioeconomic function, does not provide a socially equitable distribution of income between different segments of the population. In recent years, the fiscal significance of the personal income tax has remained, but the system of personal income taxation requires the application of progressive rates. Therefore, promising areas of future research should be the development and improvement of the mechanism of personal income taxation in the context of ensuring their socio-economic interests.

Who Should Bear the Burden of COVID-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective

The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

Welfare without rent seeking? Buchanan\u2019s demogrant proposal and the possibility of a constitutional welfare state

In a number of works, James M. Buchanan set out a proposal for a ‘demogrant’—a form of universal basic income that applied the principles of generality and non discrimination to the tax and the transfer sides of the scheme and was to be implemented as a constitutional rule outside the realm of day-to-day politics. The demogrant has received surprisingly little scholarly attention, but this article locates it in Buchanan’s broader constitutional political economy project and shows it was a logical application of his theoretical framework to the problem of inefficient and unfair welfare systems when reform to the basic institutions of majoritarian democracy was not forthcoming. The demogrant aims to end the problems of majority cycling and rent seeking that plague contemporary welfare states and therefore offers a model of welfare without rent seeking—a constitutional welfare state. We compare Buchanan’s demogrant model to other universal basic income and negative income tax models and consider the most important criticisms. We conclude that rescuing the demogrant model from relative obscurity would be a fruitful future task of applied constitutional political economy and public choice.

Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness—for the purposes of policymaking and evaluation—is to design policy that takes these ranges into account. We modify the standard optimal income tax model to include the policymaker’s subjective uncertainty over parameter values, and we characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists’ beliefs, we compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Our results suggest that robust optimal marginal tax rates are typically more progressive than in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains.

The Dynamic Optimization Model of Individual Income Tax

Individual income tax is the General term of legal norms which adjust the social relations that happened in the collection or management personal income tax between the tax authorities and the natural person. A dynamic optimization model was proposed to analysis the personal income tax from macro view, which took the personal income tax as model parameter, optimized the investment and consumption, and aimed at increasing the effectiveness of consumption. The solution of the model suggested that high earners should pay more taxes in order to increase their happiness index, while low-income individuals should pay less, even pay no tax.

Lattice-Gas-Automaton Modeling of Income Distribution.

A simple and effective lattice–gas–automaton (LGA) economic model is proposed for the income distribution. It consists of four stages: random propagation, economic transaction, income tax, and charity. Two types of discrete models are introduced: two-dimensional four-neighbor model (D2N4) and D2N8. For the former, an agent either remains motionless or travels to one of its four neighboring empty sites randomly. For the latter, the agent may travel to one of its nearest four sites or the four diagonal sites. Afterwards, an economic transaction takes place randomly when two agents are located in the nearest (plus the diagonal) neighboring sites for the D2N4 (D2N8). During the exchange, the Matthew effect could be taken into account in the way that the rich own a higher probability of earning money than the poor. Moreover, two kinds of income tax models are incorporated. One is the detailed taxable income brackets and rates, and the other is a simplified tax model based on a fitting power function. Meanwhile, charity is considered with the assumption that a richer agent donates a part of his income to charity with a certain probability. Finally, the LGA economic model is validated by using two kinds of benchmarks. One is the income distributions of individual agents and two-earner families in a free market. The other is the shares of total income in the USA and UK, respectively. Besides, impacts of the Matthew effect, income tax and charity upon the redistribution of income are investigated. It is confirmed that the model has the potential to offer valuable references for formulating financial laws and regulations.

Improving models of Tax Administration of digital Companies' Income from Commercial Activities on the Territory of the Russian Federation

In the article, the author examines the problems of taxation of income of foreign digital companies faced by the tax administrations of the countries of the world, including the Russian Federation. The subject of the study is modern models of income taxation of foreign digital companies operating in Russia and the world.The purpose of the article is to develop new approaches to the tax administration of the income tax of foreign digital companies in the Russian Federation, both for the long term and to ensure the fiscal interests of the country in the near future. Within the framework of the article, the author examines the modern concept of a permanent representative office of a foreign company, and also highlights the reasons why this concept is not applicable to organizations engaged in e-commerce. The author also gives an assessment of the feasibility of introducing a digital tax in Russia. В The scientific novelty of the work is expressed in the concept of the formation of a permanent representative office of a foreign digital company developed by the Author, as well as in proposals for its introduction into the tax system of the Russian Federation. In addition, the author gives recommendations on the introduction of a digital tax in Russia, develops the main elements of the proposed tax, such as: the object of taxation, the tax base, the tax rate, the tax period and tax benefits for this tax. Also, in order to assess the feasibility of introducing a digital tax by the Author in the conditions of limited open analytical data on cross-border e-commerce in Russia, an assessment of the economic effect for the country from the introduction of this tax is given.

Schedularity in U.S. Taxation, its Effect on Tax Distribution, Comparison with Sweden

The United States derives from a global income tax model under which it taxes it citizens and permanent residents on all their worldwide income without regard to the source of that income. Under a pure global model, the United States would combine income and deductions in a single tax computation. Other countries including Germany and Sweden originate in schedular income tax models under which the tax system classifies income by type, matches it with deductions from the same class, and computes a separate tax on each class. Neither the United States’ global model nor Germany’s or Sweden’s schedular models are free from elements of the other model.The principles of horizontal and vertical equity underlie the development of both global and schedular tax systems in advanced economies. Horizontal equity seems an indisputable precept. The horizontal equity principle is straightforward. It requires that like taxpayers incur like tax burdens. The principle of vertical equity led to the development of the progressive rate structures. Its application and limitations have proven to be more of a challenge than horizontal equity. Vertical equity departs from the principle that as one’s income or, possibly, wealth, increases, one can and should contribute more of that income to supporting governmental services. The wealthier one is, the less likely it is that an increased tax burden will diminish the individual’s welfare in any material way. Conversely, the less wealthy one is, the more likely it is that an increased tax burden will diminish the individual’s welfare materially. This paper exposes the embedded schedularity of the United States federal income tax system. The system is schedular in the three principal areas of investment income, personal services income, and tax free income. The paper compares and contrasts these schedular areas with features of schedular tax systems like Sweden or Germany, primarily Sweden, and seeks to ascertain whether each schedular feature enhances or undercuts horizontal and vertical equity of the income taxes. The paper observes that Congress has used schedular elements to accomplish distributional policy goals, initially in order to protect progressivity, but more recently that usage has shifted to increase overall regressivity in taxation. The paper concludes that United States taxation seems to be moderately schedular and that schedularity in the United States contributes to regressivity in taxation.

Pareto efficient income taxation without single-crossing

We provide a full characterization of a two-type optimal nonlinear income tax model where the single-crossing condition is violated due to an assumption that agents differ both in terms of market abilities and in terms of their needs for a work-related good. We set up a Pareto-efficient tax problem and analyze the entire second-best Pareto-frontier, highlighting several non-standard results, such as the possibility of income re-ranking relative to the laissez-faire and gaps in the Pareto-frontier.