Lump-sum Taxes Research Articles

Optimal pensions with endogenous labour supply

We show that a two-part pension system provides optimal capital accumulation without distorting labour supply, thereby achieving the first-best. An economy with too little retirement saving should combine a negative income tax with a consumption tax to replicate the first-best allocation without using any lump-sum taxes. Our results are shown in a classic Diamond overlapping generations model that is augmented with endogenous labour supply on the intensive margin.

Italian resident individuals with interests in Liechtenstein entities: notes on Italian income taxes—Part 1

Abstract It is not uncommon for Italian resident taxpayers to resort to Liechtenstein entities to take advantage of the benefits that they can offer, like asset protection, confidentiality and favorable taxation. This article tries to address some of the Italian income tax implications that Italian resident individuals with interests in Liechtenstein entities should consider. Part 1, after providing an overview on the recent agreement for the elimination of double taxation stipulated between Italy and Liechtenstein, focuses on Liechtenstein foundations and establishments, also covering the potential advantages that may derive from the combination of the Italian lump sum tax regime with the use of these legal entities. Part 2 (to be published soon in 2024), will deal with Liechtenstein limited companies and “the Italian Controlled Foreign Companies regime”.

Use and Abuse of the Concept of ‘Excess Burden’ in the Theory of Public Finance

Optimal tax theory assigns two roles to the measure of excess burden, one to compare the costs of alternative tax instruments, the other to measure the deadweight loss of specific tax instruments, which presumably correspond to the welfare costs of their distortionary effects. This paper claims that the deadweight loss provides misleading measures of welfare costs from tax distortions, because it requires to make unverified assumptions to equate costs to distortions and ensure that the deadweight loss is greater than zero. Taxes other than the lump-sum tax and tax-induced changes in relative prices cannot generally be assumed to be distortionary.

Lump-sum tax or flat income tax? Welfare implications of taxation policy in the presence of social comparison

How should the government design a welfare-optimizing taxation policy in the scenario that individuals’ utility is reference-dependent, determined in part by comparison between others’ consumption and their own? Such socially reference-dependent utility tends to yield lower social welfare, since workers must increase their labor supply to support consumption which is partially ‘neutralized’ in their utility by the consumption of other members of society. By analyzing the government’s taxation policy in a general equilibrium framework, our model shows that while a non-distortionary (ie. lump-sum) tax preserves this intuitive result, an optimized flat-rate income tax generates a striking result in which consumer welfare can be in fact increasing in the intensity of social comparison as long as the intensity is not too high. By mitigating the workers’ incentive to over-work through the income-based tax, we show that the flat-rate income tax can outperform the lump-sum tax welfare-wise in the presence of social comparison, challenging the conventional wisdom on distortionary taxes. We also conduct comparisons between the two types of taxation policies in terms of public goods provision, labor supply and consumption. The findings provide insight on optimal taxation policy design under the realistic scenario that individuals in society have socially reference-dependent preferences.

Subscription Economy: impacts on inequality

As more companies and services shift from the traditional one-time purchase to subscription-based services or a combination of both. This is primarily due to subscription-based companies growing 3.7 times faster than the companies in the S&P 500. The economy simultaneously undergoes a gradual transformation. Although subscription-based service seems to give consumers more choices about the products they buy, it increases the overall prices they pay for using the same product over a prolonged period. The increase might seem negligible over small periods, but its impact is significant over longer periods and acts as a lump-sum tax. Its properties as a lump-sum tax raises the question of whether it worsens inequality, like other regressive taxes, by disproportionally lowering poor people’s disposable income and increasing the companies’ profits. This study has found a weak correlation between SEI (Subscription Economy IndexTM) and inequality, specifically, the Gini coefficient and the U.S.’s top 0.1% net worth. The SEI is a measurement from Zuora.com’s quarterly report that seeks to analyze the growth and resilience of businesses in the subscription sector and view trends of the subscription economy. The correlation is primarily weak because the SEI grows faster than the Gini coefficient and the top 0.1% net worth by a numerical percentage of about 20% each year. However, whenever the percent change in SEI grows, so does the percent change in the Gini coefficient and top 0.1% net worth, and vice versa.

The Ricardian Equivalence under Collateral Constraints

Abstract This paper investigates the Ricardian Equivalence (RE) under collateralized debt, default, transaction costs and incomplete markets. The public debt is neutral and the RE holds only if the collateral-transfer cost depends linearly on the lump-sum tax and is fully offset. Lenders and borrowers should enter in a voluntary agreement to compensate for any transfer cost under default. However, any perturbation in the assumed affine relation undermines the debt neutrality. It is not the transaction cost per se that invalidates the RE, but rather how this cost affects the households’ indebtedness and budget constraint. The underlying mechanism is the credit channel of the fiscal policy. Whenever the transfer cost is not fully offset, there is a net tax balance leftover that affects the budget set and real allocations. This is fundamentally different from a liquidity constrained economy because the credit channel of the fiscal policy is binding and uncompensated transaction costs lead to the RE failure.

The Consequences of the 2021 Child Tax Credit Expansion: An Introduction to the Volume

The American Rescue Plan Act of 2021 temporarily transformed the Child Tax Credit (CTC) into a more generous cash benefit that was more frequently distributed to families with children in the U.S. From July to December 2021, the families of more than 90 percent of U.S. children received monthly cash payments of up to $250 per child (or $300 per young child under six); and at tax time in 2022, families received lump-sum tax refunds of up to $1,500 per child (or $1,800 per young child). Many of these families had not previously had access to the full credit because their incomes were too low. The temporary expansion was not made permanent, and the CTC returned to its pre-expansion structure in 2022. This volume evaluates the effects of the 2021 CTC expansion, and this introduction provides broad context around the expansion, elaborates on the goals for the volume, and previews the volume’s subsequent contributions.

Evaluating the impacts of renewable energy promotion policies on sustainable development: A computable general equilibrium model approach

Previous research has examined the double-dividend effects of renewable energy expansion policies, but the impact of financing mechanisms used to support this expansion has been overlooked. To address this gap, our study analyzes the economy-wide impacts of renewable energy expansion policies in Korea, with a specific focus on financing mechanisms. We employ a recursive dynamic computable general equilibrium model that considers imperfections in labor markets, heterogeneous households, and various electricity generation technologies. Our analysis examines the effects of various financing options for renewable energy on economic growth, the labor market, and social welfare, both with and without emission regulations. Our results reveal a trade-off between efficiency and equality when it comes to financing renewable energy expansion. Specifically, we find that financing the expansion through a lump-sum tax is the most efficient option, resulting in the smallest reduction in GDP compared to the business-as-usual scenario. However, this option also has the greatest negative impact on income inequality, as it leads to an increase in skill premiums and capital prices, exacerbating income disparities between households. Our findings suggest that renewable energy expansion tends to be regressive, with low-income households bearing a relatively larger burden of the costs associated with the expansion. Policymakers need to consider a range of options for alleviating income inequality and labor market disparity, such as targeted subsidies or transfers, to ensure a fair and efficient transition to a sustainable energy system.

Potential mechanisms linking poverty alleviation and health: an analysis of benefit spending among recipients of the U.S. earned income tax credit

BackgroundThe earned income tax credit (EITC) is the largest U.S. poverty alleviation program for low-income families, disbursed annually as a lump-sum tax refund. Despite its well-documented health impacts, the mechanisms through which the EITC affects health are not well understood. The objective of this analysis was to examine self-reported spending patterns of tax refunds among EITC recipients to clarify potential pathways through which income may affect health.MethodsWe first examined spending patterns among 2020–2021 Assessing California Communities’ Experiences with Safety Net Supports (ACCESS) study participants (N = 241) and then stratified the analysis by key demographic subgroups.ResultsMore than half of EITC recipients reported spending their tax refunds on bills and debt (52.3%), followed by 49.4% on housing, and 37.8% on vehicles. Only 3.3% reported spending on healthcare. (Note: respondents could list more than one possible spending category.) Participants ages 30 + were more likely to spend on bills and debt relative to those ages 18–29 (57.6% versus 39.4%, respectively). Other subgroup analyses did not yield significant findings.ConclusionsOur findings suggest that EITC recipients primarily use their refunds on bills and debt, as well as on household and vehicle expenses. This supports the idea of the EITC as a safety net policy which addresses key social determinants of health.

Instruments Stimulating Taxpayers to Transfer Their Tax Residence to the Republic of Poland

The purpose of this article is to present two tax preferences, in force from 1 January 2022, dedicated to taxpayers transferring their residence to Poland. Their way of design is an incentive to become a Polish tax resident, and their introduction to Polish income tax is justified by both economic and demographic reasons. The first of the instruments is a lump-sum tax on foreign revenue amounting to PLN 200,000, addressed mainly to natural persons with very high foreign income (high net worth individuals), who are ready to allocate significant funds for the implementation of socially beneficial projects. The second instrument stimulating the transfer of residence is the tax exemption due to the return to the country, which can be considered a type of ‘tax holiday’, as selected domestic income during the four tax years from the transfer of tax residence is subject to a limited tax exemption. The article indicates the stimulating nature of both concepts by analysing the conditions for their application in the context of a deviation from standard taxation rules. Moreover, the paper indicates that similar solutions are also applied in other countries.

Morally monotonic choice in public good games

Rational choice theory, including models of social preferences, is challenged by decades of robust data from public good games. Provision of public goods, funded by lump-sum taxation, does not crowd out private provision on a one-for-one basis. Provision games elicit more of a public good than payoff-equivalent appropriation games. This paper offers a morally monotonic choice theory that incorporates observable moral reference points and is consistent with the two empirical findings. The model has idiosyncratic features that motivate a new experimental design. Data from our new experiment and three previous experiments favor moral monotonicity over alternative models including rational choice theory, prominent belief-based models of kindness, and popular reference-dependent models with loss aversion.

LUMP-SUM TAX IS AN ALTERNATIVE TO WEALTH TAXATION

The purpose of the article is to study the topical issues of wealth taxation, which is due to the established stable trends of growth of welfare of market participants. This study can be considered relevant and in demand based on the steady trend of enrichment that has taken hold in the world. This is a consequence of the accelerated pace of economic progress aimed at improving the well-being of individuals. Modern society is characterized by a noticeable increase in the number of wealthy people and an increase in the level of well-being in general. The number of wealthy individuals is especially growing. The purpose of this paper is to determine the essence of taxation of wealthy individuals. The topic of the article is driven by the need to disclose various forms and methods of taxation of wealthy individuals. At the same time, the purpose of the article is to study not the taxation of wealth, but rather the taxation of wealthy individuals. In this regard, the mechanism of one-time taxation is considered. Methodology. A correct analysis of the structure of wealth and wealthy citizens in society makes it possible to assess the effectiveness of specific forms of taxation, including one-time taxation. Results. The article examines the issues and current specifics of the lump-sum tax. The lump-sum tax is currently applied only in some countries, but it is quite effective. Practical implications. The peculiarities of the application of a one-time tax for wealthy individuals are investigated. The economic essence of the one-time tax is investigated. The specifics of the functioning of a one-time tax for wealthy individuals in some countries of the world are considered. Value/originality. It is found that wealth is a complex, multifaceted category which can be characterized as a specific characteristic of the socio-economic structure of society, which determines its status, results, dynamics and development trends. The features of the functioning of the one-time tax in different countries of the world are considered. The use of a one-time tax as a fiscal instrument in the tax system of the state is proposed.

Theory of Optimal Taxation and Current Tax Policy in Pakistan’s Agriculture

The theory of optimal taxation has tended to recast the existing literature of public finance into the mould of classical welfare economics by emphasising minimisation of dead weight losses resulting from the imposition of a tax or faulty tax structure. As such, these modern theories have much in common with the traditional approach in terms of efficiency and equity. In spite of this, however, the differences remain. For example, the former theories adhere strictly to the norms of classical welfare economics which treats individual consumers as utility maximisers where improvements in welfare involve change that makes one individual better-off without making someone else worse-off [Stern (1987)]. In contrast to the emphasis of traditional theories on lump-sum taxes, the optimum tax literature is concerned with the implication of using non-lump-sum taxes which have a wider range and therefore more useful to the policy-maker. The recent work on normative tax theory looks at the impact of taxation on individual decisions and the trade off between raising revenues or redistributing tax burdens and the efficiency losses [Atkinson (1987)]. Finally, the optimal tax literature may be more pragmatic in its approach than traditional works as it realistically deals with government objectives and constraints and combines them into models that are sufficiently rich to allow for differences between people regarding income and expenditure patterns.

Redistributive Impact of GST Tax Reform: Pakistan, 1990-2001

Pakistan has undergone a significant change in tax structure over the last fifteen years. However, this change is not apparent on the surface, as there has not been much change in the tax to GDP ratio over the last fifteen years. But if we look beyond the surface we can see changes, for example in (1990-91), indirect taxes contributed 82 percent of total tax revenue with Customs, Excise and Sales tax each contributing around 55, 28 and 18 percent respectively, while in (2001-02), indirect tax share within the total tax revenue fell slightly to 68 percent with Customs, Excises and Sales tax each now contributing around 18, 18 and 64 percent respectively. Thus, it may not be wrong to say that there has been a significant change in the tax mix in the span of less than ten years and this development is important from the perspective of efficiency, effectiveness and equity with which revenues have and will be raised. Although, Value Added Tax (VAT) is likely to be more efficient in raising revenue than both the ordinary Sales Tax and Trade Taxes that it has replaced see e.g. [Nellor (1987); Liam Ebrill (2001)], the same cannot be said as far as the fairness issue is concerned. This in no way implies that the trade taxes replaced by VAT were more fair. However in most developing countries they operate with strict import licensing schemes, binding quotas and foreign exchange restrictions that make them more a kin to lump sum tax. Therefore in most cases they have no flow through effect to the consumers [for example see Clarete (1986); Shah (1991)]. But in contrast to this VAT being a consumption tax has the capacity to directly affect each and every household. Thus equity becomes much more of a real concern and this concern is heightened given that governments of most of the developing countries lack the capacity to carry out significant redistribution.

Majority choice of taxation and redistribution in a federation

To study redistribution and taxation in a federation, we provide a model with a central government and multiple local governments, the former with power to levy an income tax for redistribution, and the latter choosing a local income tax, property tax, lump-sum tax or subsidy, and a local public good. Policy is set by majority choice at each tier of government by households that differ by income and by ability to move among local jurisdictions. We provide sufficient conditions for existence of equilibrium and examine its properties. Central findings are federal income distribution, little local redistribution, and local preference for property taxation over income taxation to fund local public goods.

The global savings glut and the housing boom

The U.S. housing boom from 2000 to 2006 consisted of two fundamentally different phases. An increase in foreign credit supply (a savings glut) can explain the initial countercyclical run-up in house prices from 2000 through 2002, whereas an increase in domestic credit demand –driven by a relaxation of domestic credit standards– can explain the subsequent procyclical boom phase from 2003 to 2006. A tightening of domestic credit standards can fully explain the bust from 2007 to 2010. I base these conclusions on a quantitative open economy model with housing and collateralized foreign debt. Countercyclical government spending financed by a lump sum tax stabilizes house prices, output and domestic inflation over the entire boom period, pushes the economy away from the zero lower bound, and raises domestic utility.

Are Changes in (Czech Direct) Tax Law Necessary, or Is It Just a Politicum?

This contribution disproves the hypothesis that most of the changes in Czech direct tax law are adopted to minimise negative aspects connected with the Covid-19 pandemic and the Ukrainian war. On the contrary, most of the significant changes in the Czech tax law adopted in the last three years (abolition of the super-gross wage, lump-sum tax, tax relieves, etc.) had no connection to the SARS-CoV-2 coronavirus causing Covid-19 illness or the war in Ukraine. These tragic incidents were just a pretext to advance political goals.

Macroeconomic consequences of stay-at-home policies during the COVID-19 pandemic

Risks related to the coronavirus infection differ significantly across the age and the health status of individuals which suggest lockdowns targeting the unhealthy could reduce the fatalities due to the pandemic. In addition, labor productivities differ significantly across these groups, which suggest the economic consequences of targeted lockdowns could be quite different. Using an overlapping generations model with rich heterogeneity, we show that a targeted lockdown policy based on preexisting health status would have reduced the economic severity of the pandemic by 43% compared to a random lockdown. A simple system where government transfers are paid to those who stay home, financed by lump-sum taxes, could have achieved results similar to this health based lockdown.

The Paradox of Toil at the Zero Lower Bound in a TANK Model

This paper constructs a Two-Agent New Keynesian model in which the monetary authority implements a zero lower bound interest rate policy to examine whether the paradox of toil is present (i.e., whether a payroll tax cut policy is harmful to mitigating the effects of the Great Recession) during the zero lower bound period. Five notable findings emerge from the analysis. First, when the proportion of the rule-of-thumb (RoT) households is relatively small, the implementation of a payroll tax cut policy will further deepen the Great Recession. Second, when the proportion of RoT households is relatively large, the payroll tax cut policy can be a powerful policy instrument for alleviating the Great Recession. Third, as the evidence reveals a relatively large value of the proportion of RoT households in the U.S. (up to 30%), our numerical analysis calibrated to U.S. data demonstrates that the paradox of toil does not hold. Fourth, in association with either a lower profit share, a larger lump-sum tax share, a lower degree of price stickiness, or a higher probability of the shock remaining in its short run status, an additional payroll tax cut policy tends to generate a lower short-run output multiplier. Fifth, our extensions indicate that the validity of the paradox of toil is closely related to (i) the monopolistic profit and lump-sum tax distributions between RoT and optimizing households and (ii) whether the government balances its budget by levying lump-sum taxes or issuing government bonds.

Bequests or education

This paper shows that, when parents can endow their offspring with bequests and human capital, markets cannot deliver (generically under laissez-faire) the planner’s choice, if educational investments affect total factor productivity—as empirical evidence establishes. Moreover, for a human capital production function close enough to affine (around market and planner steady states with similar fertilities), the market steady state wage is higher than the marginal productivity of labor at the planner’s steady state, so that the market steady state human capital is too low. In other words, the market misses the planner’s allocation by leading households to transfer to their offspring more in bequests and less in education than would be optimal. These results obtain in spite of parents perfectly internalising (1) the value for their children of their bequests and educational investment, but not (2) the externality on total factor productivity—nor hence on factor prices. The planner’s allocation can, nonetheless, be decentralised subsidising labor income through a lump-sum tax on saving returns that reduces bequests. An estimate of the subsidy needed—for standard functional forms and parameter values estimated from US data—suggests a sizeable market inefficiency.