Linear Tax Research Articles

Optimal taxation of normal and excess returns to risky assets

AbstractWe examine optimal linear taxes on normal and excess capital income with heterogeneous rates of return, alongside an optimal nonlinear earnings tax. Households optimize a portfolio containing three types of assets: risk‐free, diversifiable risky, and private investment with idiosyncratic risk and heterogeneous expected returns. We define normal capital income as the risk‐free rate times the size of the portfolio, and excess returns as any deviations from it. In this setting, taxing excess returns is ineffective for redistribution due to a Domar–Musgrave effect and only generates revenue, to be balanced against the cost of revenue uncertainty. Taxing normal returns does serve redistribution, as they reveal information about the investors' types beyond what the earnings tax base reveals.

Environmental Taxation and the Circular Economy: What Are the Prospects in the European Context?

Abstract The transition from a linear economy model to a circular economy system heralds great opportunities: on the one hand, because by smoothing out diseconomies and reducing waste, it can favour the ecological transition and steer production in the direction of sustainability and respect for the environment; on the other, because by offering economic operators the opportunity to become more competitive and to achieve considerable advantages, it can create jobs and facilitate integration and innovation at a social and an industrial level. To this end, a dimension of environmentally targeted taxation can only assume importance, characterized by the metamorphosis from a linear taxation system to a circular taxation paradigm: the former, dominated by the principle of fiscal neutrality, loses sight of non-tax purposes to attach importance only to those of revenue, too often ending up financing expenditure for expenditure and therefore even waste; the latter, through the taxation of waste and the use of tax eco-incentives, favours reuse and recycling, fully implementing the paradigm of the circular economy. In this perspective, through the preparation of a virtuous model and the elaboration of an agenda for future European growth centred on radical changes in production and consumption processes, the circular economy system can be fully implemented, promoting sustainable development and the efficient allocation of resources.

Optimal Taxation of Informal Firms: Misreporting Costs and a Tax Reform in Brazil

Abstract This paper investigates multistage taxes on firms in a limited tax capacity economy. We characterize the optimal taxation of informal firms reinterpreting behavioral and mechanical effects. Our numerical exercises highlight the relationship between misreporting costs and the elasticities of reported revenues and costs. We explore a tax reform in Brazil with a survey of informal firms to estimate these elasticities (0.55 and 0.94, respectively), which imply smaller sheltering costs for input expenditures. The optimal multistage tax system includes (i) differential linear taxes across the production chain and (ii) a positive, but very small, tax refund rate.

Tax policies and agency costs

AbstractWe show that when large corporations are subject to a different tax system than smaller firms, the agency cost of under‐ and overinvestment is significantly altered. In contrast to the findings in the literature, the gap between the first‐ and second‐best investment trigger prices do not move in lockstep with variations in the corporate tax rate, as in the case of a linear tax system. We show that the gap can either widen or shrink, depending on the tax policy design and regime. In addition, we find that the agency cost under a progressive tax regime is considerably larger than the agency cost under a regressive tax regime when equityholders have to bear all the investment costs. These results are reversed when managers have the ability to issue additional debt to finance the firm's expansion and transfer part of the investment costs to bondholders.

Scale‐dependent and risky returns to savings: Consequences for optimal capital taxation

AbstractI present a model of optimal capital taxation where agents with heterogeneous labor productivity randomly draw their rate of return to savings. Because of scale dependence, the distribution of rates of returns can depend on the amount saved. Uncertainty in returns to savings yields an insurance rationale for taxing capital on top of labor income. I first show that, because of scale dependence, agents making the same saving decision should access the same rate of return at the optimum. I then constrain the information set of the government and show that, as soon as return are uncertain, positive capital income taxation is needed at the optimum. The optimal linear tax on capital income trades off insurance with distortions to both savings and to the rate of return in a context of scale dependence. Eventually, I argue that scale dependence in and of itself is not sufficient to justify capital taxation on top of labor income taxes. These results are still valid when agents can optimize between a risk‐free and a risky‐asset that can both exhibit scale dependence.

Robots, Trade, and Luddism: A Sufficient Statistic Approach to Optimal Technology Regulation

Abstract Technological change, from the advent of robots to expanded trade opportunities, creates winners and losers. How should government policy respond? We provide a general theory of optimal technology regulation in a second-best world, with rich heterogeneity across households, linear taxes on the subset of firms affected by technological change, and a non-linear tax on labour income. Our first set of results consists of optimal tax formulas, with minimal structural assumptions, involving sufficient statistics that can be implemented using evidence on the distributional impact of new technologies, such as robots and trade. Our final results are comparative static exercises illustrating, among other things, that while distributional concerns create a rationale for non-zero taxes on robots and trade, the magnitude of these taxes may decrease as the process of automation and globalization deepens and inequality increases.

The declining GAAP ETR trend over 1960-2016

PurposeThis study aims to provide a comprehensive analysis on the reasons of the observed trend in the GAAP ETR over 1960–2016.Design/methodology/approachThe authors use a linear tax function which allows for time-varying coefficients to track the trend in GAAP ETR over 1960–2016. This approach can decompose the ETR trend into the trends of the statutory tax rate, the propensity to recognize taxes, the tax-related firm characteristics and their coefficients. Thus, the authors can quantify the contribution of each factor in the tax function to the ETR trend.FindingsBefore 1988, the declining trend in tax expense is mainly driven by changes in the statutory tax rate; in contrast, after 1988, the trend is completely explained by firms’ decreasing propensity to recognize tax expense. While prevalent across different groups of firms, the decreasing propensity to recognize tax expense in the recent 30 years is more pronounced among firms that have higher needs for tax savings or greater tax-saving advantages.Originality/valueTo the best of the authors’ knowledge, this study is the first one that uses a trend analysis to examine the reasons for the downward trend in tax expense over a long period (1960–2016). The results show that, although the trend appears for the full sample period, it is driven by different forces between the first and second half of the time window. A decreasing propensity to recognize tax expense is the main reason for only the trend in recent years, which calls for attention from academia and policymakers. The results also show which firms have had faster trends in their propensity to recognize tax expense, suggesting targets for tax enforcement and tax researchers.

Optimal linear income taxes and education subsidies under skill-biased technical change

AbstractThis paper studies how linear tax and education policy should optimally respond to skill-biased technical change (SBTC). SBTC affects optimal taxes and subsidies by changing (1) direct distributional benefits of each policy instrument, (2) indirect, general-equilibrium effects on wages, and (3) education distortions. Analytically, the effect of SBTC on these three components is shown to be ambiguous. In simulations for the US economy, SBTC makes the optimal tax system more progressive and lowers optimal education subsidies. This is because for both income taxes and education subsidies; their direct distributional effects become more important, which more than offsets the larger general-equilibrium effects and increased education distortions.

Nonlinear redistribution of wealth from a stochastic approach

We investigate the effect of applying nonlinear redistributive taxes to the yard-sale dynamics of assets. An amount of money is collected from each individual (tax) and distributed back equally. We consider (i) a piecewise linear tax, exempting those with wealth below a threshold w0, and taxing the excess wealth otherwise, and (ii) a power-law tax with exponent α>0, which allows embracing regressive, proportional and progressive rules. The distribution of wealth obtained from numerical simulations of the agent-based dynamics is compared with the solution of its associated Fokker–Planck equation for the probability density function P(w,t) of wealth w at time t, in good agreement. Based on these solutions, we analyze how the different rules modify the distribution of wealth across the population, quantifying the level of inequality through the Gini coefficient. We note that the introduction of an exemption threshold does not always diminish inequality, depending on the implementation details. Moreover, nonlinearity brings new stylized facts in the distribution of wealth compared to the linear case, e.g., negative skewness, bimodality, indicating stratification, or a flat shape meaning equality populated wealth layers.

Using the Linear Cash Taxes Paid Model in Accounting Research: Developing a Tax Model That Permits the Inclusion of Loss-Years

Accounting tax researchers generally do not use a linear tax function to test for corporate tax avoidance. Stemming from the cash ETR function from Edwards, Kubata, and Shevlin (2021) we develop the linear cash taxes paid model where cash taxes paid are regressed on an intercept and pretax income. We find that U.S. MNEs achieve greater levels of tax avoidance with regards to taxes that are a function of current pretax income; whereas, U.S. domestic corporations achieve greater levels of tax avoidance with regards to taxes that are independent of current pretax income arising from book-tax differences. Overall, our findings complement the findings of Edwards et al. (2021), Lampenius, Shevlin, and Stenzel (2021), and answers the call for the inclusion of loss years when analyzing corporate tax avoidance (Hanlon and Heitzman 2010).

Borda-optimal taxation of labour income

I numerically compute Borda-optimal, i.e., optimal based on the Borda count as the normative criterion, labour-income tax schedules for the United States. I do so in the context of a Mirrlees-style model with quasilinear preferences and a constant elasticity of labour supply. Because the Borda count is defined for finitely many alternatives, the computations restrict attention to a finite subset of the set of continuous, piecewise linear tax schedules with (in the baseline analysis) four or fewer pieces.

Optimal taxation in asset markets with adverse selection

Constrained efficiency is characterized in an asset market, subject to search frictions, where sellers are privately informed about the type of their asset. The type determines the opportunity cost of the asset for sellers and the quality of the asset for buyers. The constrained-efficient allocation is implemented using a sales tax schedule. The optimal schedule has a single-crossing property, requiring the trading of low-quality assets to be subsidized and trading of high-quality assets to be taxed. Surprisingly, the optimal schedule could be non-monotonic in the quality or price of assets even when buyers and sellers agree on the ranking of assets. This result implies that using a linear tax schedule, as typically assumed in the literature, could significantly limit the benefits of taxation. The role of traditional search frictions, and the effects of higher measure of distressed sellers, higher quality of assets and more efficient matching technology on the optimal schedule are also studied.

Market Shifts in the Sharing Economy: The Impact of Airbnb on Housing Rentals

This paper examines the impact of Airbnb on the local rental housing market. Airbnb provides landlords an alternative opportunity to rent to short-term tourists, potentially leading some landlords to switch from long-term rentals and thereby, affecting rental housing supply and affordability. Despite recent government regulations to address this concern, it remains unclear how many and what types of properties are switching. Combining Airbnb and American Housing Survey data, we estimate a structural model of property owners’ decisions and conduct counterfactual analyses to evaluate various regulations. We find that Airbnb mildly cannibalizes the long-term rental supply. Cities where Airbnb is more popular experience a larger rental supply reduction, but they do not necessarily have a larger percentage of switchers. Affordable units are the major sources of both the negative and positive impacts of Airbnb. They cause a larger rental supply reduction, which harms local renters; they also create a larger market expansion effect, which benefits local hosts who own affordable units and may be less economically advantaged. Policy makers need to strike a balance between local renters’ affordable housing concerns and local hosts’ income source needs. We also find that imposing a linear tax is more desirable than limiting the number of days a property can be listed. We propose a new convex tax that imposes a higher tax on expensive units and show that it can outperform existing policies in terms of reducing cannibalization and alleviating social inequality. Finally, Airbnb and rent control can exacerbate each other’s negative impacts. This paper was accepted by Matt Shum, marketing. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.4288 .

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

Shapley Value and Income Taxation

Income taxation is modeled as a spatial voting game where Shapley value leads to a simple linear tax function on gross income with a single marginal tax rate and a universal basic income subsidy. Shapley net income is not generally in the game core; therefore, it is inherently unstable and subject to relentless pressure from higher gross income individuals to reduce their taxes and increase their net incomes.

Quo Vadis Tax and Levy Burden of Wages in the Czech Republic? Tax Reform in 2022

The article deals with changes in personal income taxation in the Czech Republic in 2022 and their impact on the tax burden. The article also deals with the levy burden represented by payments for social security contributions. An extensive tax reform changing the method of taxation of income from dependent activities took place in the Czech Republic in 2021. Its continuing effects was added with impact of legislation changes after 1 January 2022. The most significant change is the increase in the taxpayer’s relief by CZK 3,000. The assessment of how these changes affect the tax burden was made by calculating the effective tax rates. The research methodology includes methods of regression and correlation analysis and methods for time-series analysing. The average wages used by the Czech Social Security Administration for the purposes of calculating social security contributions were used for the analysis. The results show that the tax burden has decreased since 2022 if basic taxpayer relief is applied. For the taxpayer, who, in addition to the taxpayer’s relief, also claims a tax credit for children, the tax burden increases slightly. Although in most cases, the income is subject to the nominal linear tax rate, in comparison with the previous year, there is an increase in the progressivity of the personal income tax due to the rise of the tax relief per taxpayer. On the other hand, social security contributions are both nominally and real linear. There are no significant reforms in this area in comparison with the tax burden. Due to the decrease in the tax burden, in some cases, the levy burden of social security contributions is higher, even though their nominal rate is lower than the nominal income tax rate.

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk

We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of private precautionary saving on factor prices and taxes capital unless the weight on future generations in the social welfare function is sufficiently high. For logarithmic utility a complete analytical solution of the Ramsey problem exhibits an optimal aggregate saving rate that is independent of income risk, whereas the optimal time-invariant tax on capital implementing this saving rate is increasing in income risk. The optimal saving rate is constant along the transition and its sign depends on the magnitude of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently induces a Pareto-improving transition even if the initial equilibrium capital stock is below the golden rule.

Producer's choice of design-for-environment under environmental taxation

Nowadays, the concept of Design for Environment (DfE) is getting more and more important and popular for sustainable operations. Observations from real-world practices and extant literature indicate that currently, companies do not have strong incentive to establish DfE. To this end, this paper proposes the use of an environmental tax to enhance DfE, which will contribute to reducing wastes from the origins, improving the environmental performance and maximizing the social welfare. In this paper, by building a stylized analytical model, we examine three forms of environmental taxes (linear tax, constant tax and zero tax) and evaluate how they affect the producer's optimal DfE level. We interestingly find that the “constant tax” does not encourage sustainable product design and the “zero tax” is even better than the “constant tax”. On the contrary, the “linear tax” can promote sustainable product design and can be regarded as the best. We further discover that the “linear tax” can help balance the DfE level, the stakeholders’ benefits and the social welfare performance. The leveraging effect of marginal DfE allowance in the “linear tax” is surprisingly important and useful. Finally, we extend the basic model to cover four cases to check the robustness of the analytical results in the basic model and several important managerial insights for the development of sustainable product design are generated from the stakeholders and environment perspectives.

Tax Evasion, Efficiency, and Bunching in the Presence of Enforcement Notches

A recent literature has studied bunching at notches in tax systems; but work on the implications of bunching for welfare has been limited. We consider a setting where there are discrete changes in the enforcement of tax compliance at certain levels of reported income, creating notches that can lead to bunching. We find that greater levels of bunching can be associated with greater tax efficiency. A simulation exercise demonstrates that notches with greater bunching can be associated with higher welfare than notches with less bunching, and that a tax system with bunching at a notch can generate higher overall social welfare than a revenue-equivalent no-evasion linear tax. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.