Labor Income Tax Research Articles

Labor income taxes in an economic federation with proportional membership fees

A significant part of the revenue in the EU budget is raised via a GNI-based resource. The purpose of this paper is to use a stylized model of an economic federation to analyze how this way of raising funds to the central authority affects the labor income taxes implemented by the lower-level governments. This question is analyzed both when the federal fee is proportional to GNI and proportional to GDP. One key result is that if the government in a lower-level jurisdiction acts as a Nash follower vis-a-vis the other governments in the public sector, then there is an incentive to implement a higher tax on labor. Another is that if the lower-level government is able to exercise decentralized leadership vis-à-vis a federal government which is concerned with redistribution, then the incentive structure underlying the taxation of labor is independent of how the federal government collects its revenue.

Envelope wages, hidden production and labor productivity

Abstract We evaluate the relative importance of aggregate labor productivity versus income taxes and social contributions for tax compliance in an economy with a large degree of informality. Empirical evidence points out that tax evasion in Europe happens through partially concealing wages and profits in formally registered enterprises. To this end, we build a model in which employer-employee pairs of heterogeneous productive capacities make joint decisions on the degree of tax evasion. The quantitative model is used to analyze the case of Bulgaria which has the largest informal economy in Europe and underwent a number of important tax reforms over the period 2000–2014, including the introduction of a flat income tax in 2008. The estimation strategy relies on matching the empirical series for the size of the informal economy and other aggregate outcomes for 2000–2014. Our counterfactual experiments show that the most important factor for the changing size of the informal economy is labor productivity, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest. We find that the 2008 flat tax reform did not play any visible role in coping with informality.

Optimal Dynamic Taxation with Distinctive Forms of Social Status Attainment

AbstractWe examine the role of both consumption‐ and wealth‐induced social comparisons in setting dynamic optimal income taxation. Under complete information, state‐invariant labor income taxes are used to remedy the externality caused by consumption‐induced social comparisons, while state‐contingent capital income taxes are used to remedy the externalities caused by both consumption‐ and wealth‐induced social comparisons. Under incomplete information, distinct types of agents are subject to an identical marginal capital income tax, which removes social comparisons. To solve the information problem, low‐productivity agents could be subject to a lower marginal labor tax than high‐productivity agents, which contradicts the traditional result in the Mirrlees–Stiglitz models.

Long-term changes in married couples' labor supply and taxes: Evidence from the US and Europe since the 1980s

We document the time-series of employment rates and hours worked per employed by married couples in the US and seven European countries (Belgium, France, Germany, Italy, the Netherlands, Portugal, and the UK) from the early 1980s through 2016. Relying on a model of joint household labor supply decisions, we quantitatively analyze the role of non-linear labor income taxes for explaining the evolution of hours worked of married couples over time, using as inputs the full country- and year-specific statutory labor income tax codes. We further evaluate the role of consumption taxes, gender and educational wage premia, and the educational composition. The model is quite successful in replicating the time series behavior of hours worked per employed married woman, with labor income taxes being the key driving force. It does however capture only part of the secular increase in married women's employment rates in the 1980s and early 1990s, suggesting an important role for factors not considered in this paper. An independent and important contribution of the paper is that we make the non-linear tax codes used as an input into the analysis available as a user-friendly and easily integrable set of Matlab codes.

Social Comparisons and Optimal Taxation in a Small Open Economy

AbstractIn this paper, we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption. The main results crucially depend on whether the government can tax returns on savings abroad. If the government can use flexible residence‐based capital income taxes, then the optimal policy rules from a closed economy largely carry over to the case of a small open economy. If it cannot, then capital income taxes become completely ineffective. The labor income taxes must then indirectly also reflect the corrective purpose that the absent capital income tax would have had.

Optimal human capital policies under the endogenous choice of educational types

This study examines optimal human capital policies under nonlinear labor and capital income taxes in the presence of consumption value of education in a two‐period setting. We show that when individuals can choose educational types differing by the relative importance of consumption value and production value, education subsidies for low‐type individuals should not equal an efficient level that offsets distortions induced by nonlinear taxes on labor and capital income. Our findings imply that education policy does not restore efficiency, or the Diamond–Mirrlees production efficiency theorem fails. Moreover, capital income taxation is optimal, which means that the Atkinson–Stiglitz theorem breaks down.

How do tax progressivity and household heterogeneity affect Laffer curves?

How much additional tax revenue can the government generate by increasing the level of labor income taxes? In this paper, we argue that the degree of tax progressivity is a quantitatively important determinant of the answer to this question. To make this point, we develop a large scale overlapping generations model with single and married households facing idiosyncratic income risk, extensive and intensive margins of labor supply, as well as endogenous accumulation of human capital through labor market experience. We calibrate the model to U.S. macro, micro, and tax data and characterize the labor income tax Laffer curve for various degrees of tax progressivity. We find that the peak of the U.S. Laffer curve is attained at an average labor income tax rate of 58 % . This peak (the maximal tax revenues the government can raise) increases by 7 % if the current progressive tax code is replaced with a flat labor income tax. Replacing the current U.S. tax system with one that has Denmark' s progressivity would lower the peak by 8 % . We show that modeling the extensive margin of labor supply and endogenous human capital accumulation is crucial for these findings. With joint taxation of married couples (as in the U.S.), higher tax progressivity leads to significantly lower labor force participation of married women and substantially higher labor force participation of single women, an effect that is especially pronounced when future wages of females depend positively on past labor market experience.

The burden of labour taxation in Croatia, Slovenia and Slovakia in the period 2011–2017

This paper analyses the developments in labor income taxation in Croatia, Slovenia and Slovakia during the period 2011–2017. While the systems of social insurance contributions in these countries were relatively stable, their personal income taxes have undergone more important changes. Using tax-benefit microsimulation models, we compute average and marginal tax rates for the sample units and assess the impact of tax-benefit systems on income distribution.

THE IMPACTS OF IMPLEMENTING THE CARBON TAX ON FOSSIL FUELS: A HYBRID CGE ANALYSIS FOR INDONESIA

This paper investigates the environmental and economic impacts of introducing the CO2 taxation on carbon-based fuels using a detailed disaggregation of energy-economy-environmental CGE model for Indonesia. The carbon tax has yet to be implemented in Indonesia. However, this instrument has been considered in the Ministry of Finance report as one of the governments fiscal strategic framework to finance the countrys action plan in commitments to reduce the GHG emissions. Suppose that the government levies the tax of Rp. 100,000/ton CO2e under two possible revenue-recycling scenarios: the carbon tax revenue is recycled through a reduction of labour income tax rate or an increase of government spending on commodities. For comparison purpose, we also implement the non-compensated scenario of which the additional revenue from carbon tax is kept as government savings to run budget surplus. Overall, the results suggested that the carbon tax reduces the national emissions but adding more costs to the economy,resulting a fall in GDP. In terms of income distribution, the carbon tax tends to be progressive in both scenarios of revenue-recycling. However, when there is no compensating mechanism, the carbon tax tends to be regressive - the poorer households carry a higher share of the carbon tax burden.

Globalization and Labor Force Participation

This study finds evidence that globalization depresses labor force participation via social spending and tax policy. We estimate a panel Vector Auto Regression model on data over the period of 1980~2012 from the 26 OECD countries. Social spending has increased, consistent with the compensation hypothesis, while labor income taxes have risen relative to capital income taxes, consistent with tax competition hypothesis. As a result, one can see the reduction of labor force participation. Social safety nets and tax policies need to be streamlined upon globalization.

Is exit tax a good idea for the taxman?

PurposeThe purpose of this paper is to study whether it is a rational choice for a tax authority to impose an exit tax on capitalists.Design/methodology/approachThe tax authority chooses a lump-sum exit tax to maximize a weighted objective of expected tax revenue and expected tax horizon. The tax revene consists of capital income taxes and exit taxes. Capitalists are motivated by sustainable capital accumulation and hence maximize the terminal capital stock.FindingsThe author finds that the objective function of the tax authority is strictly increasing in the exit tax, which holds for extensions with sales tax, labor income tax or proportional exit tax, and hence equilibrium exit tax is equal to an exogenous upper bound.Originality/valueTo the author’s knowledge, no existing literature investigates this issue theoretically, and hence the current paper represents the first attempt. The author hopes this theoretical analysis can trigger related empirical studies.

Optimal Mirrleesian taxation in non-competitive labor markets

This study investigated optimal labor income taxation in non-competitive labor markets. Necessary and sufficient conditions are provided for constrained efficient allocations that are implementable via taxes. Not all allocations that can be implemented in a competitive setting satisfy the necessary conditions for implementation. If an allocation that maximizes a utilitarian objective is implementable then almost all workers face negative marginal tax rates. If the planner’s objective is Rawlsian, implementation is always possible with a well-chosen unemployment benefit financed by taxes on profits.

Intergenerational policies, public debt, and economic growth: A politico-economic analysis

This study presents a two-period overlapping-generations model with endogenous growth. In each period, the government representing young and old generations provides a public good financed by labor income taxation and public debt issuance, and the government's policies are determined by probabilistic voting. Increased political power of the old lowers economic growth. A debt-ceiling rule is considered to resolve the negative growth effect, but it creates a trade-off between generations in terms of welfare.

Optimal Income Taxation Theory and Principles of Fairness

The achievements and limitations of the classical theory of optimal labor-income taxation based on social welfare functions are now well known. Even though utilitarianism still dominates public economics, recent interest has arisen for broadening the normative approach and making room for fairness principles such as desert or responsibility. Fairness principles sometimes provide immediate recommendations about the relative weights to assign to various income ranges, but in general require a careful choice of utility representations embodying the relevant interpersonal comparisons. The main message of this paper is that the traditional tool of welfare economics, the social welfare function framework, is flexible enough to incorporate many approaches, from egalitarianism to libertarianism. ( JEL D63, H21, H24, J24)

Optimal Fiscal Policy with Consumption Taxation

AbstractWe characterize optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labor income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policymaker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labor income taxation. Then, we quantify numerically each of these gains by calibrating the model on the U.S. economy.

Türkiye’de Kayıtdışı Ekonominin Vergi Politikalarının Sürdürülebilirliği Üzerindeki Etkisi

Calismada, Turkiye’de kayitdisi ekonominin vergi politikasinin surdurulebilirligi uzerindeki etkisi tartisilmakta ve vergi politikasinda yeni tasarimlar arastirilmaktadir. Kayitdisi ekonomi iktisat politikalarinin ongorulebilirligini zayiflatmakta, vergi gelirlerini azaltmakta ve yasadisi faaliyetleri ozendirmektedir. Turkiye’de vergilendirmenin dolayli vergiler ve ucretliler uzerinden kesilen gelir vergisine kaymasi vergi koridoru (vergi tuzagi) olusturarak vergi politikasinin surdurulebilirligini sinirlandirmaktadir. Calisma neticesinde gelismis ulkelerde kayitdisi ekonominin tahmini boyutunun gelismekte olan ulkelere nispeten daha dusuk oldugu gozlenmekte, dolayli vergilerin kayitdisiligi azalttigi tezi gercegi yansitmamakta ve vergi incelemeleri sonucunda yuksek oranda vergi geliri butceye kazandirilmaktadir. Turkiye’de tuketim uzerinden alinan vergilerde ust sinira yaklasilmasi bir vergi koridoru olusturmakta ve vergi politikasi esnekligini kaybetmektedir. Mali disiplinin surdurulmesi icin kamu harcamalarinda verimlilik arttirilmali ve kayitdisi ekonomiyle ciddi bir sekilde mucadele edilmelidir.

Optimal fiscal policy with labor selection

This paper characterizes long-run and short-run optimal fiscal policy in the labor selection framework. In a calibrated non-Ramsey decentralized equilibrium, labor market volatility is inefficient. Keeping fixed the structural parameters, the Ramsey government achieves efficient labor market volatility; doing so requires labor-income tax volatility that is orders of magnitude larger than the “tax-smoothing” results based on Walrasian labor markets, but a few times smaller than the results based on search and matching markets. We analytically characterize selection-model-consistent wedges and inefficiencies in order to understand optimal tax volatility.

Collective Labor Supply, Taxes, and Intrahousehold Allocation: An Empirical Approach

ABSTRACTMost empirical studies of the impact of labor income taxation on the labor supply behavior of households use a unitary modeling approach. In this article, we empirically analyze income taxation and the choice of working hours by combining the collective approach for household behavior and the discrete hours choice framework with fixed costs of work. We identify the sharing rule parameters with data on working hours of both the husband and the wife within a couple. Parameter estimates are used to evaluate various model outcomes, like the wage elasticities of labor supply and the impacts of wage changes on the intrahousehold allocation of income. We also simulate the consequences of a policy change in the tax system. We find that the collective model has different empirical outcomes of income sharing than a restricted model that imposes income pooling. In particular, a specification with income pooling fails to capture asymmetries in the income sharing across spouses. These differences in outcomes have consequences for the evaluation of policy changes in the tax system and shed light on the effectiveness of certain policies.

AGE‐DEPENDENT TAXES WITH ENDOGENOUS HUMAN CAPITAL FORMATION

AbstractWe assess the gains attained by the introduction of age‐dependent labor income taxes in an overlapping generations economy where individuals live a meaningful life cycle and endogenously accumulate human capital. The model is sufficiently rich to isolate the role of general equilibrium effects, credit market imperfections, and different forms of human capital accumulation. The large welfare gains we obtain cannot be attained without age dependence, nor can they be attained with age‐dependent taxes if progressivity of labor income taxes and capital income tax rates are not suitably adjusted to profit from the complementarity of these instruments.

Be careful what you calibrate for: Social discounting in general equilibrium

Concerns about intergenerational equity have led to an influential practice of setting social utility discount rates based on ethical considerations rather than to match household behavior, particularly in climate change economics (e.g., Stern, 2006). This paper formalizes the broader policy implications of this approach in general equilibrium by characterizing jointly optimal environmental and fiscal policies in a climate-economy model with differential planner-household discounting. First, I show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy: If the government discounts the future less than households, implementing the optimal allocation requires an effective capital income subsidy (a negative intertemporal wedge), and, in a setting with distortionary taxation, an effective labor-consumption tax wedge that is decreasing over time. Second, if the government cannot subsidize capital income, the constrained-optimal carbon tax may be up to 50% below the present value of marginal damages (the social cost of carbon) due to the general equilibrium effects of climate policy on household savings. Third, given the choice to optimize either carbon, capital, or labor income taxes, the socially discounting planner's welfare ranking is ambiguous over a standard range of parameters. Overall, in general equilibrium, a policy-maker's choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy.