Marginal Deadweight Loss Research Articles

How Responsive are Firms to the Corporate Wealth Tax?

The corporate wealth tax is commonly associated with a non-optimal policy in terms of fiscal revenue and efficiency. However, there is no empirical evidence regarding the behavioral response of firms to this tax. By using a bunching methodology, which takes advantage of the non-linearities introduced by the tax design in Colombia, this paper estimates the elasticity of corporate wealth with respect to the statutory tax rate. Results indicate that, in the years when the tax is in force, we observe between 23.8% and 35.7% more firms at the wealth cutoffs where the tax rate changes. This implies estimated elasticities of 0.250 and 0.296 for firms with wealth around 3 billion pesos, which points out negative and inelastic responses of firms' wealth when facing an increase in the statutory tax rate. Absent fiscal externalities, the estimated elasticities are associated with a revenue loss and marginal deadweight loss of around 1% of fiscal revenue on the evaluated taxpayer firms.

Marginal deadweight loss when the income tax is nonlinear

Most theoretical work on how to calculate the marginal deadweight loss has been done for linear taxes and for variations in linear budget constraints. This is quite surprising because most income tax systems are nonlinear, generating nonlinear budget constraints. Instead of developing the proper procedure to calculate the marginal deadweight loss for variations in nonlinear income taxes, a common procedure has been to linearize the nonlinear budget constraint and apply methods that are correct for variations in a linear income tax. Such a procedure leads to incorrect results. The main purpose of this paper is to show how to correctly calculate the marginal deadweight loss when the income tax is nonlinear. A second purpose is to evaluate the bias in results that obtains when a linearization procedure is used. Our main theoretical result is that the overall curvature of the tax system plays the same role as the curvature of indifference curves for the size of the marginal deadweight loss. Using numerical simulations calibrated on US data, we show that common linearization procedures may lead to substantial overestimation of the marginal deadweight loss.

A Natural Gas Severance Tax—An Economic Analysis

AbstractThis study estimates the economic effects of a severance tax on the market for natural gas produced from shale sources using non‐conventional extraction methods, such as horizontal drilling and fracking. Results suggest that a severance tax of 5 % would increase the price of natural gas by as much as 3.82 % and decrease gas extraction by an estimated 1.16 % to a value of 9.52 %. If applied to the Commonwealth of Pennsylvania in the United States, a 5 % severance tax is estimated to raise between US $443 and $486 million per year in public revenue. The marginal deadweight loss associated with a 5 % severance tax is estimated between 1.27 % and 12.85 % of the last dollar earned. The burden of this tax falls on both producers and consumers and depends upon the underlying assumptions made regarding the price responsiveness of consumers and producers. Under plausible assumptions, a family consuming 1000 MMcfs (≈2.8×104 m3) per year of natural gas is estimated to pay an additional $100 per year after the implementation of a 5 % severance tax.

Measuring the deadweight loss from taxation in a small open economy: A general method with an application to Sweden

The paper develops a simple general equilibrium framework for calculating the marginal deadweight loss from taxation in a small open economy. The framework allows a decomposition of the deadweight loss from each tax instrument into the losses stemming from the contraction of the different tax bases. The paper describes a method of calibrating the model which exploits the links between the various factor supply elasticities implied by the standard life cycle model. It also presents a method of estimating effective tax rates that is consistent with optimising household and firm behaviour. To illustrate how the model works, it is calibrated to a data set for Sweden. The quantitative results indicate that more than half of the marginal deadweight loss from taxes on capital may stem from their negative impact on the tax bases for labour income and consumption.

Optimal Cordon Pricing and Road Investment Under Optimal Building Size Regulation

This paper explores the simultaneous imposition of cordon pricing and population density regulations in a closed monocentric city with traffic congestion. It explores also how to optimize road investment at all locations. We show the optimal level of pricing, the optimal location of the cordon line and the optimal width of road at all locations in a city. Results show that 1) optimal toll can be represented by the difference in the marginal deadweight loss per household in the floor area market across the cordon line, 2) optimal cordon location should be determined so that the rent difference across the cordon line is balanced with the difference of the deadweight loss in the floor area market across the cordon line, 3) in both the inside zone and the outside zone of the cordon line, minimum (resp. maximum) FAR regulation are required at locations close to the CBD side (resp. the urban boundary side), and 4) how the benefit of widening a road inside and outside the cordon line can be measured.

Marginal Deadweight Loss When the Income Tax is Nonlinear

Almost all theoretical work on how to calculate the marginal deadweight loss has been done for linear taxes and for variations in linear budget constraints. This is quite surprising since most income tax systems are nonlinear, generating nonlinear budget constraints. Instead of developing the proper procedure to calculate the marginal deadweight loss for variations in nonlinear income taxes a common procedure has been to linearize the nonlinear budget constraint and apply methods that are correct for variations in a linear income tax. Such a procedure leads to incorrect results. The main purpose of this paper is to show how to correctly calculate the marginal deadweight loss when the income tax is nonlinear. A second purpose is to evaluate the bias in results that obtains when the traditional linearization procedure is used. We perform calculations based on the 2006 US tax system and find that the relative deadweight loss caused by increasing existing tax rates is large but less than half of Feldstein’s (1999) estimates for the 1994 tax system.

THE DEMAND FOR VANITY (PLATES): ELASTICITIES, NET REVENUE MAXIMIZATION, AND DEADWEIGHT LOSS

States raise revenue and provide a service when offering to personalize license plates. To determine the revenuE‐maximizing price and the marginal deadweight loss per dollar of net revenue, one must estimate both the slope and shift factors of the demand for vanity license plates. Shift factors include the percentage of special background plates sales (price of a complement), the requirement of front and back license plates (preferences), the age distribution (population), and income. Each $1 increase in the annual cost of owning a vanity plate reduces the final percentage of all plates personalized by 0.08%. At least ten states continue to charge a price exceeding the revenuE‐maximizing level. Many other states raise funds whose marginal social cost exceeds marginal net revenue by over 100%.

The Efficiency Effects of Removing the Diesel Fuel Rebate Scheme

The diesel fuel rebate scheme which returns most of the excise on diesel fuel used off‐road by agricultural and mineral producers has been debated. Removal could cause three inefficiencies (input choice distortion. deadweight losses on reduced exports, and flowon inefficiencies in domestic processing) and two efficiencies (from reducing other taxes and savings on administrative and compliance costs). Empirical studies suggest high net efficiency costs from removal, but while business input taxes have no place in an efficient taxation structure, a small reduction in the rebate could yield some revenue at a low marginal deadweight loss.

TAX EVASION AND THE MARGINAL COST OF PUBLIC FUNDS

Tax evasion and deadweight loss have similar implications for the rules of public finance. The optimal mix of taxes can be derived from the minimization of the sum of aggregate deadweight loss and aggregate cost of tax evasion. Similarly, the marginal cost of public funds includes allowances for marginal deadweight loss and marginal cost of tax evasion per dollar of public revenue acquired.

The flypaper effect and the deadweight loss from taxation

The difference in the effects on public expenditure by local governments of consumer's incomes and intergovernmental grants is shown to be consistent with the maximization of a representative consumer's utility by a local government. Increasing marginal deadweight loss of taxation accounts for the result. Explanations of the flypaper effect do not therefore require models of strategic bureaucratic behavior or voter misperceptions.

Another note on deadweight loss

In a recent article, J.A. Kay proposed a useful measure of the deadweight loss arising from a commodity tax system. The measure answers the question: How much more would the taxed consumer be willing to pay in a lump sum rather than as a commodity tax? Kay's computation of the marginal deadweight loss does not yield the change in this measure for small changes in commodity tax rates, however. This note clarifies Kay's otherwise excellent contribution, derives the measure for Cobb–Douglas utilities, and examines a useful property of it.