Model Of Optimal Taxation Research Articles

Налоги солидарности как инструмент межрегионального перераспределения рентных доходов в России

Increase in rent relations contributes to the strengthening of interregional income inequality, since business entities appropriate the territorial rent in economically developed regions. Traditional income taxation instruments do not deal with the redistribution of territorial rent. On the contrary, such instruments, as the progressive personal income tax in Russia, can increase interregional inequality. Therefore, the presents study aims to substantiate the possibility of using a solidarity tax for interregional redistribution of rent income and develop the optimal tax model for current conditions. The article describes the solidarity tax from the perspective of rent taxation, determines its key features and methods of levying. To examine interregional income inequality, constituent entities of the Russian Federation were clustered using Ward’s method according to average monthly wages and the share of personal income tax in the regional budget. Each cluster is characterised by similar personal income and tax revenue. The solidarity tax burden will be on the regions of the first four clusters. It is proposed to levy the solidarity tax as a personal income surtax on a progressive scale, depending on the ratio of accrued wage of a taxpayer and the average monthly wage in Russia for the previous year. This approach will contribute to a smooth change in the effective personal income tax rate, as well as to at least 74% increase in subsidies to budgets to compensate for raising the wages of public sector employees. The developed proposals can be applied to improve the tax mechanism of redistribution of rent income. Future research may focus on developing alternative models of solidarity taxes, including for entrepreneurial and corporate income, in the context of the Covid-19 pandemic.

Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data

We develop a model of optimal taxation and redistribution under an ambitious climate target. We take into account vertical income differences, but also explicitly capture horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon and labor taxes, transfers and energy subsidies, we investigate analytically how vertical and horizontal inequality is considered in the welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal and show that redistribution of carbon tax revenues via household-specific transfers is the first-best policy. Under plausible assumptions on inequality aversion, transfers to energy-intensive households should be about five times higher than transfers to energy-efficient households. Equal per-capita transfers do not require to observe households’ efficiency type, but increase equity-weighted mitigation costs by around 5 percent compared to the first-best. Mitigation costs increase by less, if the government can implement a uniform clean energy subsidy or household-specific tax-subsidy schemes on energy consumption and labor income that target heterogeneous energy efficiencies. Horizontal equity concerns may therefore constitute a new second-best rationale for clean energy policies or differentiated energy taxes.

The social cost of carbon and inequality: When local redistribution shapes global carbon prices

The social cost of carbon is a central metric for optimal carbon prices. Previous literature shows that inequality significantly influences the social cost of carbon, but mostly omits heterogeneity below the national level. We present an optimal taxation model of the social cost of carbon that accounts for inequality between and within countries. We find that climate and distributional policy can generally not be separated. If only one country does not compensate low-income households for disproportionate damages, the social cost of carbon tends to increase globally. Optimal carbon prices remain roughly unchanged if national redistribution leaves inequality between households unaffected by climate change and if the utility of households is approximately logarithmic in consumption.

Optimal Taxation in a Federation and GST in India

Optimal tax models, starting from Ramsey (1927), are often studied using a single government. However, there are several countries which are federations and in that multiple levels of government have fiscal authority, which masks the heterogeneity across states. In this paper we study a federation with two states and a federal government. We first find that the optimal tax design indicates tax smoothing across the states and consumption smoothing across states and time. Moreover, optimal consumption is found to be independent of the tax rates. We also find that all governments cannot have zero borrowing simultaneously. Then we characterize two equilibria, one where both federal and state governments impose taxes and two, where only the federal government imposes tax. We find that in the first equilibrium, states potentially impose different tax rates, but consumption across states are the same. In an equilibrium with a single federal tax, consumption is smooth across time, but may not be equal across states. However, aggregate consumption in the economy is greater in the second equilibrium. India has adopted a nationwide GST system, moving away from multiple taxation. So, we then calibrate the model to Indian data and find the revenue neutral tax rates. We find that the highest revenue neutral tax rate is 20.1% and the median rate is 11.4%. Using the calibrated indirect tax rates in a regression analysis, we find that tax rates at the state level is negatively related to the growth rate of the state. So, after the implementation of GST in India, some states may see a higher level of consumption tax rate in the state and hence, a fall in growth rate.

External Diseconomy Theory and Environmental Management: Optimal Taxation Model in China Marine Management

External Diseconomy Theory and Environmental Management: Optimal Taxation Model in China Marine Management

The Capital Gains Tax- Boon or Bane: A Case of Kenya

This paper assesses the viability of the capital gains taxation in Kenya. Taxation being the only predictable source of government revenue to finance public spending and manage economy regarding economic development. The optimal tax model informs the government of the way to maximize the tax revenue enforcement and collection and promotion of the economic wellbeing. A tax introduced in the system should maximize revenue earning for the government as well as spur economic growth. The re-introduction of the capital gains tax in January 2015 on the capital assets and basing on the gains realized thereafter on the disposal of assets has proved to be productive and persuasive to economic growth. The robust real estate sector and high performing stock market through the Nairobi securities exchange (NSE) has widened the tax net and increased tax revenue collection for the government. It remains an ideal that maximizes revenue as well as promoting economic grow. Moreover, on regional integration perspective, the re-introduction of Capital Gains tax is seen as a step towards bridging the differences in fiscal and tax policies between the East African States by aligning Kenya to its neighboring countries that impose tax on capital gains. With ever increasing merits the capital gains tax should be enforced in our economy.

Democratisation and tax structure in the presence of home production: Evidence from the Kingdom of Greece

This paper examines the impact of democratisation on tax structure in an agrarian economy where goods can be produced at home for self-consumption. We first develop a model of optimal taxation with heterogeneous agents where the good produced in the market is subject to a consumption tax, whereas the homogeneous good produced at home is burdened by a direct tax (such as land tithes). Contrary to conventional theory, our model suggests that extension of the voting franchise to poorer segments of the population exerts a negative impact on the share of direct to indirect taxes. Using unique national and regional tax data for the Kingdom of Greece - a typical agrarian economy where universal male suffrage was established in 1864 - we provide consistent empirical evidence. Greek governments adjusted tax policy in order to meet the preferences of the newly enfranchised electorate that constituted mostly peasants and farmers. This group was harmed substantially by direct taxes on land but was able to avoid indirect taxes through self-consumption. We also analyse a sample of 12 European countries over the same period and provide evidence for a similar change in the tax structure when the agricultural sector dominates the economy.

Critical Review of the (Second Wave) Optimal Tax Theories

James Mirrlees (1971) launched the second wave of optimal tax models by suggesting a way to formalize the planner’s problem that deals explicitly with unobserved heterogeneity among taxpayers.So, in this paper optimal income taxation theories are subject of investigation following the classic paper in public finance by Mirrlees (1971). This provides analytical solutions for the second-best efficient tax system in presence of such an adverse selection. Until late 1990s, Mirrlees results were not closely connected to empirical tax studies and had little impact on tax policy recommendations. Next, the famous result Diamond-Mirrlees efficiency theorem Diamond-Mirrlees (1971a), Diamond-Mirrlees (1971b),has been reviewed. This theorem is important because it states that there should be no taxes on intermediate goods, and that private and public production should be based on same prices. Also, taxation should not violate efficiency of production. Solution to the Mankiw problem on the other hand states that small open economy, labor bears 100% of small capital income tax.

Optimal Fuel Taxation With Suboptimal Health Choices

Transport has a large number of significant externalities including carbon emissions, air pollution, accidents, and congestion. Active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified additional social gains from active travel due to health benefits of increased physical exercise. In fact, on a per mile basis, these benefits dominate the external social costs from car use by two orders of magnitude. We introduce health benefits and active travel options into an optimal taxation model of transport externalities to study appropriate policy responses. We characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under central parameter assumptions it rises by 49% in the US and 36% in the UK. This is due to the low fuel price elasticity of active travel. We argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap its full health benefits.

Optimal taxation with unobservable investment in human capital

Abstract In a Ramsey model of optimal taxation, if human capital investment can be observed separately from consumption, it is optimal not to distort human or physical capital accumulation in the long run, and only labour income taxes should be used. However, in reality the government can’t always distinguish between investment in human capital and pure consumption, so a tax on labour or consumption will necessarily tax human capital. We find that when investment in human capital is unobservable, the optimal policy is to tax human capital at a positive rate, even in the long run. Whether physical capital should be taxed or not depends on its degree of complementarity with human capital versus labour.

The Social Cost of Carbon and Inequality: When Local Redistribution Shapes Global Carbon Prices

The social cost of carbon is the central economic measure for aggregate climate change damages and functions as a metric for optimal carbon prices. Previous literature shows that inequality significantly influences the level of the social cost of carbon, but mostly neglects a major source of inequality - heterogeneity in income below the national level. We characterize the relationship between climate and redistributional policy in an optimal taxation model that explicitly accounts for inequality between and within countries. In particular, we demonstrate that climate and distributional policy cannot be separated when national governments fail to compensate low-income households for climate change damages: Even if only one country does not compensate especially affected households, the social cost of carbon increases globally. Further, we use numerical methods to estimate the scope of these effects. Our results suggest that it is crucial to correct previous estimates of the social cost of carbon for national distributional policies.

The Hedonic Theory of Taxation: An Application to the U.S. Income Tax

F.Y. Edgeworth labeled the utility sacrifice theory of taxation the Hedonic Theory of Taxation. According to this model, each household unit should bear a portion of the aggregate tax burden so as to sacrifice the same amount of utility or the same proportion of their utility from income. This was long regarded as an appealing but impractical idea owing to the inability to measure cardinal utility. But the recent ‘Happiness’ survey literature has resulted in credible estimates of a cardinal utility function, and this is used in this paper to apply the hedonic model to the 2010 U.S. Personal Income Tax in a revenue neutral setting. the result is a moderately progressive personal income tax, with a top quintile average rate of about 11% and a top percentile average rate of about 17%, the latter being less than at present. As compared to optimal tax models, hedonic taxation is simple and the notion of equal sacrifice appears to enjoy public support. We find little difference in average rates between equal absolute and equal proportional sacrifice.

Reflexões sobre as incidências tributárias no Brasil e suas relações com o desenvolvimento socioeconômico nacional

This essay, based on theories of public finances and the optimal taxation model, sought to reflect on the national tax landscape. Its great motivation was due to the existence of very few studies that deal systematically with the analysis of the various forms of tax incidence and the need for greater attention by the government and society in relation to the National Tax System (STN). The analysis of the current legislation with comparative effect in several published works on the subject was promoted. The placements resulting from the effort of this trial demonstrate that the STN cannot appropriate any of the ideals of the optimal taxation, neutrality, simplicity, progressivity, and fairness model. Finally, some suggestions of the literature for a tax reform in Brazil were discussed and the choice of a system with a high tax burden was highlighted, in the face of the search for a welfare state.Keywords: National Tax System, fiscal policies, tax incidence, regressiveness, socioeconomic development.

Government Debt Bias

Almost all governments issue large stocks of debt. Optimal taxation theory typically concludes that they should hold large stocks of assets. To reconcile facts and theory, we introduce two simple modifications into an otherwise standard optimal taxation model with commitment: government impatience and continuous debt limits. Two results are obtained. First, positive government debt is optimal for even minimal government impatience. Second, the optimality of negative government debt disappears even without impatience if discrete debt limits are replaced by very wide but continuous debt limits. We go on to quantify the implications for debt, interest rates and business cycle dynamics.

Environmental Policy in the Presence of Induced Technological Change

We examine the hypothesis that induced technological change (ITC) can dramatically lower the cost of a carbon tax in a static optimal tax model. The research and development sector is represented by an aggregate stock of energy-saving technology, which acts as a weak substitute with a polluting resource in the energy generation sector. Using this model, we analytically show how ITC occurs and affects the cost of a carbon tax. Applying quantitative estimates of the size of ITC to numerical simulations calibrated to the US economy, we find that existing empirical evidence can reduce the welfare cost of environmental tax reform by 12%. Our tests of alternative parameters show that this result is highly sensitive to the assumptions used, suggesting that ITC could result in much larger reductions in cost.

Fiscal Federalism and Optimal Income Taxes

This paper studies how local policies?specifically, taxes on income with redistributive goals?affect the migration decisions of individuals and, in turn, how these migration decisions affect local and economy-wide tax and redistribution policies. The author develops a model of optimal taxation for a federal system of governments in the tradition of Mirrlees (1971), where taxes can be fully nonlinear but informational asymmetries prevent the equalization of well being across workers due to informational rents. This article extends the large literature on federalism and tax competition by obtaining optimal tax formulas for the federal and state governments. The literature has mainly focused on inefficiencies that arise due to fiscal externalities when governments have access to restricted instruments (for example, allowing only linear taxes). Contrary to previous results in that literature, the author shows here that state governments will provide redistribution through taxes and that, in a symmetric equilibrium, the overall tax schedule that combines the actions of both the federal and state governments is the same as that of a unitary government. This implies that, under the conditions analyzed in the model, there is no reason to restrict income redistribution objectives to the federal government only, as commonly prescribed in the literature.

Welfare and labor supply implications of tax competition for mobile labor

We introduce tax competition for mobile labor into an optimal-taxation model with two skill levels and analyze a subgame-perfect Nash equilibrium of the game between two governments and two taxpayer populations. Tax competition reduces the distortion from the informational asymmetry and increases labor supply of the less productive individuals. When one of the countries has a larger population, this effect is more pronounced in the smaller country. Tax competition generally tends to make societies more libertarian. Particular welfare effects for high and low skilled depend on the form of the government objective function.

De Gustibus non est Taxandum: Heterogeneity in preferences and optimal redistribution

The prominent but unproven intuition that preference heterogeneity reduces redistribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises, in terms of first-order stochastic dominance, with income. Given familiar functional form assumptions on utility and the distributions of ability and preferences, a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived. Numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy.

Book Reviews

David Albouy of the Department of Economics at the University of Illinois reviews “Tax Systems”, by Joel Slemrod and Christian Gillitzer. The Econlit abstract of this book begins: “Presents a tax-systems approach for addressing many critical tax policy issues. Discusses the need for tax-system analysis; standard optimal tax models; multiple behavioral margins; multiple sources of costs; tax base elasticity; multiple tax-system instruments; the general model; standard instruments with new costs; endogenous elasticity; optimal observability and complexity; notches and optimal line drawing; and future directions. Slemrod is Paul W. McCracken Collegiate Professor of Business Economics and Public Policy in the Ross School of Business, Professor of Economics, and Chair of the Economics Department at the University of Michigan. Gillitzer is a graduate student of economics at the University of Michigan.”

Optimal Taxation, Social Preferences and the Four Worlds of Welfare Capitalism in Europe

Drawing on the formal setting of optimal taxation theory, this paper identifies the degree of Rawlsianism (poverty aversion) exhibited by European social planners, beginning with the observation of actual data and redistribution systems. The paper contributes to the comparative research on the structure and typology of welfare capitalism. The social preferences implicit in tax‐benefit systems are recovered by inverting the optimal taxation model for all European countries using European Union Statistics on Income and Living Conditions data. The results are discussed in light of the four worlds of welfare capitalism classification proposed by Esping‐Andersen.