Optimal Tax Rate Research Articles

The perverse effect of sin taxes: the rise of illicit white cigarettes

ABSTRACTIn this paper, we define illicit white cigarettes as cigarettes that are legal in the country of production, but that are illegally smuggled into other markets without the payment of applicable taxes. This paper analyzes whether taxes create a price wedge between legal and illicit cigarettes and thereby affect the availability and trade of illicit whites across markets. Through original, self-conducted point-of-sale surveys and discarded pack collections across 18 cities, we find that cigarette taxes significantly affect the market for illicit whites. Moreover, based on a smoker survey, we find that the illicit white market is supported by consumers’ willing to purchase illicit products for their reduced prices. It is beyond the scope of this paper to ascertain the optimal tax rates on cigarettes or the stringency of enforcement measures to reduce smoking rates (the desired health outcome). However, gaining a better understanding of the effects of taxes on illicit white trade and consumption is vital because our research suggests that current ‘sin taxes’ drive illicit activity and therefore reduce the effectiveness of higher taxes in curbing the use of cigarettes.

The Khaldûn−Laffer Curve Revisited: A Personal Income Tax−Based Analysis for Turkey

This paper focuses on an old but still discussed postulate, the Khaldun-Laffer curve, and empirically applies it to personal income tax by using annual time-series data of Turkey for the period 1970-2015. From our analysis, two fundamental findings emerge: first, Turkish data provides evidence in favor of the Khaldun-Laffer curve, suggesting that there is a non-linearity between tax rates and tax revenue. Second, the optimal tax rate that maximizes revenue from personal income tax is 15.03% against the current rate we estimate at 15.37%. These findings imply that Turkey’s current personal income tax rate falls slightly into the prohibitive range of the curve. Overall, it is safe to argue that the current personal income tax rate should be lowered to its optimal value to maximize the revenue from personal income taxation. If done so, the Turkish fiscal authorities would be able to generate more revenue with a relatively lower tax rate.

Spatially-variable property tax and optimal tax composition in congested monocentric cities: George, Pigou, Ramsey and Strotz unified

We explore the optimal spatial structure of the property tax in a monocentric city with transportation congestion. To show how the availablity of revenue instruments impacts the properties of the optimal property tax, we discuss three regimes with different combinations of a head tax, congestion tolls, and property tax. In each regime, the tax composition is optimally determined to finance a predetermined expenditure. Under the first regime, with all the three taxes available, the first-best allocation is achievable only when the property tax is unused. Under the second regime, where only head and property taxes are available, a spatially variable property tax substitutes for the unavailable congestion tolls; the head tax (or subsidy) fills the gap between the property tax revenue and the predetermined expenditure. Moreover, property tax is negative (positive) close to the city center (boundary). Under the third regime, where only property tax is available, the role of the property tax is twofold: to substitute for the unavailable congestion tolls and to finance the predetermined expenditure. In general, for both roles, the optimal tax rates are spatially variable. Furthermore, if its role as a substitute for congestion tolls dominates its other role, the property tax may be negative close to the boundary.

Minimum unit prices for alcohol

Minimum unit prices (MUPs) have been proposed on the grounds that they can reduce alcohol consumption of the heaviest drinkers, without significantly burdening moderate drinkers. This paper examines the case for MUPs in an optimal tax framework. Such a policy can improve welfare when two conditions are both satisfied. First, beverage quality and quantity should be substitutes. Second, there should be more distortion to consumption of cheaper alcohol than to more expensive varieties. The consequences of a MUP for the optimal corrective tax are explored with a calibrated numerical example. This example illustrates how the optimal tax rate might be higher when used in isolation, than when a MUP is also being used.

Simulation and Analysis on the Optimal Tax Rate of Water Resources in Yunnan Province

The shortage of water resources has become an increasingly common problem. One of the biggest challenges in China’s current economic development is the prominent contradiction between water supply and demand in some densely populated areas. Although Yunnan Province has abundant water resources, due to factors such as precipitation timing, uneven distribution, regional geological conditions and low water-use efficiency, there are also contradictions in water supply and demand. In order to accelerate the transformation of extensive regional water resources utilization and achieve sustainable regional economy development, this paper establishes a Computable General Equilibrium Model (CGE) incorporating water resources elements of Yunnan Province, and simulates the water price changes. The conclusion is that the reasonable tax rate of water resources in Yunnan Province should be about 13%. Considering the corresponding average water price, the average specific tax rate of water resources should be 0.21 yuan/m3.

Service Good as an Intermediate Input and Optimal Government Policy in an Endogenous Growth Model

The present article considers an endogenous growth model in which the service output is used as intermediate good in commodity sector, tax is imposed on manufacturing product and the revenue earned is invested to create human capital. It is shown that there exists a unique, saddle path stable steady-state growth rate of human capital accumulation and a unique growth-maximizing tax rate. The optimal tax rate for the command economy is compared with growth-maximizing tax rate in competitive economy. A numerical analysis shows that the command economy will have a higher growth rate than the competitive economy. An extension of the model where households privately spend for accumulation of human capital yields the same growth rate as that of the command economy of the previous model. JEL Classification: E6, H2, O4

Optimal Tax Rate and Its Effect on Copper Mine Resource Tax in China: A Computable General Equilibrium Model

Optimal Tax Rate and Its Effect on Copper Mine Resource Tax in China: A Computable General Equilibrium Model

Optimal Production Tax in a Mixed Market with an Endogenous Market Structure

We investigate how the optimal production tax rate is affected by privatization policies in a mixed oligopoly in which a state‐owned public firm competes against private firms in a free‐entry market. First, we investigate the domestic private firm case. The optimal tax rate is strictly positive except for the full privatization and full nationalization cases, and the relationship between the optimal tax rate and degree of privatization is an inverted U‐shape. Next, we investigate the foreign private firm case and find that the non‐monotonic relationship disappears.

What Should the Optimal Income Tax Rate Be?

In this paper, we present a model that enables us to calculate the optimal income tax rate, given a specific utility function from leisure and consumption of private and public goods. The main contribution of our paper is presenting a new approach for determining the optimal tax rate: instead of focusing on the social planner’s point of view, we focus on the private agent’s point of view. We assume a given labor supply function and calculate the loss of income which equals increased government supply following tax imposition. Taking into consideration the loss of utility following decreased private consumption as well as increased public utility following increased leisure and public consumption, we calculate the income tax rate that would maximize an agent’s benefit. We examined our model by gradually changing labor supply elasticity, wage per hour, and the parameter of marginal utility from public consumption. We find that as labor supply elasticity increases, the optimal tax rate should be lower. On the other hand, as wage per hour increases, the optimal tax rate should be higher. Finally, as the parameter increasing utility from public consumption is lower, the optimal tax is lower.

Optimal tax policy in an endogenous growth model with a consumable service good

The paper analyses the optimal tax policy in an endogenous growth model in a command economy, where the commodity output is produced with only physical capital, and skilled labour is the only input in producing the service good. In the benchmark model, per capita government expenditure is used to create human capital. Two cases are considered regarding taxation: in the first, tax is imposed on both commodity and service sectors, while in the second only the service sector is taxed. In each case the model derives the optimal tax rate and steady-state growth paths. In the first regime where both sectors are taxed we find the optimal tax rate on the service sector to be zero, but on commodity output it is positive. However, in the second regime there is also a unique optimal tax rate on the service sector to finance human capital accumulation. Comparing the growth rates in both cases we also observe that the imposition of tax on only the service sector instead of on both sectors yields a higher rate of growth if the population growth rate along with the marginal productivity of human capital is sufficiently high. We also show that when the service sector is taxed it may grow at a higher rate than the manufacturing sector. An extension of the benchmark model in which government spends tax revenue on accumulation of human capital as well as physical capital confirms that the optimal service tax rate is zero, but the optimal commodity tax rate is positive when both sectors are taxed.

Optimal Income Taxation with Endogenous Prices

We study an optimal income taxation problem in a Mirrleesian setting with endogenous product prices and positive firm profits. When firm profits are progressively distributed among agents, we show that the public authority uses the price level as a redistributive tool favoring lower prices in competitive markets. This leads to higher marginal taxes in the optimum. Using simulations, we show that this price effect adds around 4 percentage points to marginal income tax rates. In oligopolistic markets, market power adds an additional non-competitive component to the price effect that exerts downward pressure on optimal tax rates. Using simulations, we show that, as the market structure varies, changes in non-competitive and redistributive components almost cancel each other out for medium and high degrees of equity concerns. Thus, optimal income tax policy remains stable across various market structures. We also analyze how commodity and profit taxation influence the price and non-competitive effects.

Researches on Optimal Tax Rate and Its Effect of Copper Mine Resource Tax in China

As an important natural resource, mineral resources are indispensable necessities for human’s social existence and economic development. As China’s industrialization process continues to gradually increase, conflicts about resource constraint and ecological pressure resulting from economic and social development are increasingly evident. Key problems of how to guarantee the security of national mineral resources supply, ease the contradiction of resource constraint, and reduce ecological pressure are significant current challenges in China. The Chinese government has successively implemented new types of resource taxes including valorem and free fee and regulate reform for oil, natural gas, and coal resources in an attempt to adjust differential income needs and protect resources. Given these efforts, there have also been strategies to reform policies for the use and taxation of non-ferrous metal resources. In 2016, the Chinese Ministry of Finance and the State Council jointly issued a government document to comprehensively promote the reform of resource tax policy. This document also set the standards of tax rate for seven metal minerals. Copper is one of the regulated minerals, and the tax rate range of copper mine was set as 2% to 8%, dependent on the conditions of different provinces. We constructed a resource computable general equilibrium (CGE) model to investigate the optimal tax rate of copper resource under ad valorem duty in China. The results showed that the best tax rate is 4%. Based on this optimal rate, a dynamic CGE model was built to analyze and dynamically forecast the macroeconomic impact of different tax rates, providing insight into the best strategy to enable cost control for enterprises and efficient and effective policymaking by the government. Because comprehensive resource tax reform remains in the exploratory stage, the results of this study will provide a reference for the future optimization of the copper mine resource tax rate.

Optimal choice between local content requirement and fiscal policy in extractive industries: A theoretical analysis

This paper develops a simple framework to analyze the links between local contents (LC) promotion in extractive industries and several elements of fiscal policy in a resource-rich host country. Though usually the owner of the natural resources underground is the host government (HG), the main operator in the upstream is mostly a multinational corporation (MNC), which possesses requisite skills to extract resources. We build a game in which these two players negotiate on how to share the profit by means of various fiscal elements. As the goal of HG is obviously not restricted to maximizing resource revenue, it also needs to design a tax system and a LC program consistent with diversification needs of domestic economy. Due to the trade-off between two policies and to accomplish both goals, the HG needs to enforce MNC on how to perform an optimal LC plan. Our principal finding is that, there is an optimal LC that maximizes domestic welfare and it is higher for the resource rich countries that are able to supply better quality inputs. We characterize the optimal LC policy and its interaction with income-tax rate. As a policy experiment, we analyze the effects of world oil price on the incentives of HG as to which policy to implement. To that end, our finding is that as world resource price increases, the optimal LC level remain constant, but optimal tax rate becomes more progressive. In other words, the fiscal policy is predicted to prevail the LC policy in the advent of higher resource prices.

Features of optimization of direct taxation taking into account the effect of Dupuit-Laffer

The purpose of the research. The main purpose of the article is to improve the methodological support for optimizing direct taxation in Ukraine based on economic and mathematical modeling and taking into account the Dupuit-Laffer effect. It is tax optimization that should be used as the basis for reforming the tax system, the purpose of which is to ensure the maximum possible increase in tax revenues to the budget, and to minimize tax evasion. Methodology. To optimize taxation, such economic and mathematical modeling methods as mathematical programming, correlation and regression analysis, and 3D modeling were used. Results. As a result of the study, the optimal tax rates for two national direct taxes in Ukraine were obtained, which would ensure the maximization of tax revenues to the budget. Thus, the optimal tax rate on profits should be 1% higher than the existing one, and the optimal tax rate on personal income should be 6.5%. Then the total state revenue from both taxes will be more than 226 billion UAH. Also, as a result of the study, the prerequisites for the formation of the progressive taxation of personal income to ensure its optimality were identified. Practical meaning. The practical significance of the study lies in the applied nature of the proposed methodological support, which can also be used to optimize indirect taxation, in particular the excise tax and import duty, which is especially important during the implementation of changes to the Tax Code in the field of customs clearance of cars. The further researches of the author will be devoted to this. Another direction of further development will be the optimization of taxation in the context of fiscal decentralization.

Malaysian corporate tax rate and revenue: the application of Ibn Khaldun tax theory

PurposeThe present study aims to investigate the impact of the reduction of the corporate tax rate on corporate tax revenue. The study adopts the theory of taxation by Ibn Khaldun, depicted as the Laffer curve.Design/methodology/approachThe paper analyses time series data for the period 1996 to 2014 using the autoregressive distributed lag (ARDL) approach.FindingsThe paper finds that the corporate tax rate has a dual effect on corporate tax revenue over the study period. It shows an inverted U-shape relationship between the corporate tax rate and corporate tax revenue and reveals that the optimal tax rate is 25.5156 per cent. Inferentially, a positive relationship exists between the two variables prior to the optimal tax rate, and a negative relationship prevails afterwards. A further test of causality shows a long-run unidirectional causality between corporate tax rate and corporate tax revenue.Research limitations/implicationsFirst, it should be noted that the policy was not implemented in isolation. Several other tax incentives were given to corporate tax payers, and therefore, such incentives should be controlled for to have a more insightful evaluation of the policy. Second and most important, there is a need to investigate whether the increased cash flow available to firms as a result of the reduction in the corporate tax rate adds value to firms. It is also necessary to investigate whether firms’ stakeholders benefited from the increased cash flow or was there managerial diversion of firms’ resources.Practical implicationsThe policy of gradual reduction of the corporate tax rate in Malaysia is suspected to have a positive impact on the productivity of Malaysian companies, which has contributed to an increase in corporate tax revenue. It also has a positive impact on the economic growth of the country. It means that the lower corporate tax rate has actually reduced the cost of doing business in the country.Originality/valueThe benefit of increased corporate tax revenue needs to be investigated empirically for insightful policy evaluation. In Malaysia, however, such investigation is close to non-existent to the best knowledge of the researchers. Thus, the present study aims at investigating the impact of the policy of gradual reduction of the corporate tax rate on corporate tax revenue over an 18-year period from 1996 to 2014.

PEMBELAJARAN PENGANTAR ILMU EKONOMI: KURVA LAFFER DAN PEMANFAATAN APLIKASI EXCEL

The use of spreadsheet has huge potential to enhace experience and learning quality for students. For this reason, it is not surprising that spreadsheet is widely used as a learning tool in academe. This article discusses the use of Microsoft Excel as a learning tool with application for Laffer curve. The Laffer curve is a popular yet controversial tool so that it is very important for students to learn it in Introduction to Economics course to show relationship between tax rate and tax revenue. With reviewing the exisiting literature it is shown origins and prospects regarding the Laffer curve and the possibility of Microsoft Excel for estimating it. Estimating the existence of the Laffer curve can be easily done, but identification of the optimal tax rate and prerequisites for the optimal rate to achieve are beyond the scope of standard Introduction to Economics textbooks. In addition, using real data to construct the Laffer curve make it possible for the students to firstly expose to regression analysis as well as how to analyse data in real world practice. Keywords: Spreadsheets, Microsoft Excel, Laffer curve, Tax, Introduction to Economics.

Optimal design of carbon tax to stimulate CCS investment in China's coal‐fired power plants: A real options analysis

AbstractCarbon tax is an important policy instrument to control greenhouse gases. How to design a suitable carbon tax rate is of significance for policy makers. This study aims to address this issue from a microeconomic perspective by exploring the decision behavior of a potential investor. A trinomial tree model based on real options theory is presented to evaluate carbon capture and storage (CCS) investment in coal‐fired power plants considering uncertain factors. The model is then applied to a case study and the main findings are as follows: (1) carbon tax policy will have a positive effect on the CCS investment. If the carbon price is not high enough to trigger CCS investment, a hybrid mechanism integrating carbon trading and carbon tax to stimulate CCS investment is required; (2) in applying the trinomial tree real options model, the optimal carbon tax rate should be 145.3 RMB/ton for supercritical pulverized coal (SCPC) (or 79.54 RMB/ton for integrated gasification combined cycle (IGCC)) plants under current market condition and at current technological levels; (3) the optimal carbon tax rate is sensitive to uncertainties. Specifically, the optimal tax rate depends largely on not only the cost of the CCS investment but also the portfolio of carbon price volatility and the initial carbon price level. These conclusions provide the theoretical foundations for decision making regarding CCS investment and related policy making. © 2018 Society of Chemical Industry and John Wiley & Sons, Ltd.

Natural cycles and pollution

In this paper, we study a competitive economy where a pollution externality, coming from production, impairs the renewable resource affecting the consumption demand in turn. A proportional tax, levied on the production level, is introduced to finance public depollution expenditures.In the long run, two steady states can coexist, the one with a lower resource level, the other with a higher level. Interestingly, a higher green tax rate reduces the natural resource in the low steady state, giving rise to a Green Paradox (Sinn, 2008). Moreover, the green tax can be welfare-improving in the higher steady state but never in the lower one. Therefore, in the second one, it is better to reduce the green tax rate as much as possible. Conversely, the optimal tax rate is positive and unique in the steady state with more natural resource.In the short run, the two steady states can collide and disappear through a saddle–node bifurcation. Since consumption and natural resource are substitutable goods, a limit cycle can arise around the higher stationary state. To the contrary, this kind of cycles never occurs around the lower steady state, no matter the resource effect on consumption. Finally, focusing on the variety of bifurcations of codimension two, we find a Bogdanov–Takens loop.

Optimal Public Investment in Economic Centers and the Periphery

We analyze productivity enhancing public expenditure in a spatial economic model with labor mobility, firm-specific increasing returns to scale, and transport costs. Building on Krugman (1991), Fujita, Krugman and Venables (1999) and Redding (2016), we compare optimal investment and tax policies of fiscally autonomous regions to those of a benevolent central planer. We find transport costs and the size of scale effects to influence optimal tax and spending rates under both regimes. For sufficiently low transport costs and low substitutability between manufactured goods, regional fiscal autonomy leads to underinvestment: The lower the transport costs, the lower the local investment, and the higher the potential welfare gain through centralized policies. Our results challenge the view that local public goods should be financed entirely by local governments. They also help explain the recent decline of public investment at the municipal level in fiscally decentralized countries like Germany.

Progressive Taxation of Extractive Resources as Second-Best Optimal Policy

The paper provides a critical review of the literature on the concept of progressivity in the taxation of petroleum and mineral resources and offers a fresh perspective on its purpose and measurement. Regressive taxes, such as royalties, exist to satisfy policy objectives other than revenue maximization, such as achieving early revenues, while rent-based or profit-sensitive fiscal instruments must be designed with progressive marginal rates to maximize government revenues. Hence, the emphasis should be placed on tax rate progression of the direct taxation of profit or rent, rather than progressivity in the overall government take. However, as regressive taxes, by their very nature, tend to be distortionary, the optimal degree of progression in the rent- or profit-tax rates must take these distortions into account. The central ideas are illustrated with a simple analytical model in which a second-best optimal tax rate schedule on profit is characterized in the presence of the tax distortions caused by the regressive taxes. Some practical implications of the analysis are discussed.