Proportional Tax Research Articles

Is the dual income tax a real alternative to traditional income taxes?

In the fiscal reforms undertaken throughout the last decade, the dual income tax system, based on a broadened concept of income and progressive tax rates, has been implanted in several countries as an alternative model to traditional tax systems. The dual tax is characterised by combining a progressive taxation on labour and transfer incomes with a proportional taxation on capital income. Moreover, the capital income tax rate is generally set at the same level as the existing corporate tax rate. In this paper, the most important characteristics of both tax systems are compared. The theoretical arguments that justify these reforms are examined and then the main characteristics of the current dual taxes in the Nordic countries and Holland are analysed. We conclude with some comments on the viability of extending this tax system to other countries.

Indeterminacy and Stabilization of Endogenous Cycles with Balanced-Budget Distortionary Taxation

We study the effects of distortionary labor taxation on endogenous cycles and the indeterminacy of equilibria in an overlapping-generations model with a balanced-budget rule. Under proportional taxation there is a critical tax rate above which cycles vanish, while with linearly progressive taxation there is a critical level of tax exemption below which cycles also vanish. If the utility function is quasilinear, increasing the tax rate can cause the economy to become determinate both with proportional and with linearly progressive taxation, whereas a sufficiently high tax exemption can make equilibrium indeterminate if the utility function is more general.

The Box system in the Netherlands: an alternative?

The Dutch tax reform of January 1, 2001 replaced the progressive personal income tax on dividend, interest and rental payments by a presumptive capital income tax on the value of the assets net of liabilities. The tax code assumes that personally held assets earn a return of 4%, which is taxed at a proportional tax rate of 30%. Actual capital income is no longer relevant under the presumptive capital income tax. This paper discusses and analyses the Dutch capital income tax system after the tax reform of January 1, 2001. Further tax reform policies that might resolve the remaining capital income tax distortions (the Allowance for Corporate Equity (ACE) and the Allowance for Shareholder Equity (ASE) tax system) are also discussed. JEL codes: H2, H3.

Thema: Zur Einbindung der Kapitalbesteuerung in ein rationales Steuersystem

Abstract In the paper of Stefan Homburg recent proposals for capital income tax reform are considered. The analysis focusses on German taxes, but experiences from abroad as well as the European Savings Directive are also taken into account. Given the present complexity of capital income taxation, the crucial question is whether or not Germany should adopt a dual income tax. After considering questions of distributive justice, tax yield, efficiency, and compliance, the article advocates in favour of a comprehensive income tax, combined with a strengthening of tax audit, and rejects the idea of a dual income tax. Manfred Rose und Daniel Zöller state that the taxation of interest-adjusted income from capital means that tax is levied only on the part of income generated by the investment of savings capital that exceeds a normal market rate of interest. As enterprise profits also constitute capital income, interest adjustment (i.e. allowance for corporate equity) here means that a normal market rate of interest on equity capital can be deducted as a business expense. In the following article Rose and Zöller assess the future prospects for such a form of taxation of income from capital by considering its advantages over the comprehensive taxation of capital income in accordance with the traditional concept of income taxation. Furthermore, in order to create as quickly as possible a favourable tax environment for investments at locations in Germany, they present the outlines of a transitional model for the taxation of interest-adjusted income from capital. From Joachim Genser’s point of view the main problem is that taxing capital income at a flat rate contrasts with progressive income taxation of comprehensive income under the ability-to-pay principle. He argues that the dual-income-tax principle is well founded in the theory of taxation and thereby provides a justification for schedular taxation of capital and labor income as well as for combining proportional capital taxation and progressive labor taxation. Finally, besides the attractive features of a dual income tax, he also addresses the problems of dual income tax administration and its social acceptance.

Does endogenous formation of jurisdictions lead to wealth-stratification?

Conditions under which endogenous processes of jurisdiction formation entail wealth-stratification are examined in a model where unequally wealthy households with identical preferences form jurisdictions in order to produce a public good financed by proportional taxation. We define a stable jurisdiction structure to be a partition of the households into jurisdictions that is immune to individual deviations. We define a jurisdiction structure to be wealth-stratified when each jurisdiction is composed of households who form an interval with respect to the ordering of their wealth. We show that a necessary and sufficient condition for the stratification of any stable jurisdiction structure is for the individual preferences for the public and the private good to exhibit a relation of gross substitutability/complementarity between the public good and the private good that is independent from prices and wealth.

Tax accounting in the late medieval German territorial states

This paper examines tax accounting in the late medieval German territorial states, where we find that tax accounting starts in an oral context. By the thirteenth and fourteenth centuries, miscellaneous notes on taxes arising in various contexts were commonly augmented by wax tablets or tallies as practical devices to help operate the early taxation system. Later, the adoption of paper for record-keeping permitted the maintenance of independent tax accounts. Finally, specialist accounts were used as records as part of the auditing process and to serve, in the fifteenth century, as evidence of tax payments. This transition was associated with the shift away from proportional taxes (Quotitätssteuern) to scaled-down taxes (Repartitionssteuer). At the end of the fifteenth century, the regional German princes thus had available to them written information that provided a reliable source for estimating tax revenue which had the potential to contribute towards the creation of the modern state. In contrast, the Empire's attempt to tax all subjects by means of the so-called ‘Common Penny’ failed and left the Empire without an effective financial database.

The Savers-Spenders Theory of Fiscal Policy: Corrigendum

Martin Feldstein has called to my attention an error in my paper “The Savers-Spenders Theory of Fiscal Policy” (American Economic Review, 2000 (Papers and Proceedings), 90(2), pp. 120–25). Specifically, the discussion of Proposition 4 in that paper contains a mistake which, while not affecting the proposition as stated, alters the proof and the numerical calibration that follows it. Proposition 4 examined how government debt affects the capital stock in an economy where the steady state is pinned down by the Euler equation for an infinitely-lived Ramsey consumer, but, in contrast to standard Ricardian analysis, taxes are distortionary. If taxes are raised with a proportional income tax with rate , the following equations describe the steady state:

Economic Sociology: The Recursive Economic System of J. S. Mill

In a recent paper, R. Ekelund and D. Walker (1996) argue that, “[i]ncentives, utilitarian principles, and the diffusion of property rights are the key to understanding Mill on the statics and dynamics of ‘equity and justice’”(p. 576). Their paper, which deals with John Stuart Mill's views on taxation, reads very much like a modern defense of popular capitalism. From the static point of view, it is imperative not to interfere with the internal relationship between economic variables and thus, distort incentives (proportional income tax). From the dynamic point of view, “inheritance taxes [are] the essential mechanism of an evolutionary change towards anefficiently functioning capitalism” (p. 578, italics added).

On the Counterfactual Problem of Welfare State Research: How Can We Measure Redistribution?

To measure welfare state redistribution, it is standard to compare the income distributions before and after taxes and transfers. This approach incorrectly assumes that the pre fisc distribution is independent of the welfare state. This paper identifies four sources of bias in the pre/post-approach: 1) Welfare states redistribute both between individuals and between generations, 2) Labor supply responses vary between socio-economic groups and depend on taxes and transfers, 3) The redistribution within social insurance schemes depends on the correlation between risk and income, and 4) Welfare states use public education to influence the distribution of earnings capabilities. I combine theoretical models, numeric simulations and empirics to examine the bias caused by these factors. Results indicate that the pre/post approach is more biased for welfare states with flat rate benefits and proportional taxation, that positively income-related benefits have a redistributive effect, and that public expenditure on primary and secondary education reduces inequality.

Taxation and pricing when consumers value freedom

Suppose that beyond valuing the goods he consumes, a person also values freedom, which increases with the number of different bundles he can afford. We show that citizens may therefore favor proportional taxes over lump-sum taxes, progressive taxes over proportional taxes, quantity rationing over price increases, and fixed fees allowing unlimited use of a service.

The Interaction of Tax Exemptions and Individual Tax Reform Preferences

The individual voting behavior on the abolishment of single income-tax exemptions crucially depends on how strongly agents are affected by other deduction possibilities that are not at stake in the reform plans of the government. The interactions depend (i) on the shape of the tax schedule, and (ii) on how the government wants to use the revenue that is generated by the cut of tax privileges. If government plans to increase redistribution in form of lump-sum transfers, then the political chances of a tax reform increase with the existence of other deduction possibilities under progressive taxation. With proportional taxation and a budget-enlargement policy, the voting decision depends only on the particular tax privileges at stake. Matters are different if the government wants to adopt a revenue-neutral tax-cut-cum-base-broadening policy. Except for strong progression, it is less likely that an agent supports the elimination of tax privileges the stronger she is affected by other exemptions in the back.

Optimal Commodity Taxation When Land and Structures Must Be Taxed at the Same Rate

We show that the optimal property tax rate rises with the ratio of land rents to structure and land development costs. California's high ratio of income to property tax revenue and the distribution of Federal housing subsidies thus appear geographically misplaced. Proportional taxation of non-housing commodities is not optimal, even when elasticities with respect to wages are identical. Absent externalities, the desirability of transportation taxes and anti-sprawl growth controls hinge on the relative importance of time versus money in commuting costs.

Politically Determined Income Inequality and the Provision of Public Goods

AbstractPolitical processes may bring about Pareto improvements by increasing income inequality in a society that produces a public good by voluntary contributions. Proportional taxation funds a “governing agent.” The most endowed agent is the Condorcet winner for governing agent. When the tax rate can also be chosen by a vote, the ideal point of the agent with median initial endowment is the Condorcet winner under Cobb–Douglas utility. If Pareto improvements are possible, this ideal point corresponds to Pareto improvement. Pareto improvement may also be possible, even when a Leviathan set taxes, if there is deadweight loss from taxation. Pareto improvements are indeed always possible in “large” societies. On the other hand, no improvements may be possible if the initial distribution of wealth is very unequal in a “small” society, and Condorcet winners may not exist for other utility functions.

Reexamination of Economic Growth, Tax Policy, and Distributive Politics

AbstractThe paper examines the relationship between economic growth, tax policy, and distribution of capital and labor ownership in a one‐sector political‐economy model of endogenous growth with productive government spending financed by a proportional tax on capital income. The analysis shows that inequality in wealth and income can be positively or negatively related to the optimal tax rate. In either environment, higher inequality leads to a lower after‐tax return to capital, thereby reducing the economy's growth rate.

A Nondistortionary Property of Environmental Taxes

than other taxes, or less? In a reply to their pioneering paper, Bovenberg and de Mooij (1997, p. 252) wrote, [I]n the presence of distortionary taxes, environmental taxes tend to be more, rather than less, distortionary than other Possibly pointing in the other direction, Sandmo had earlier observed that, when the revenues from environmental taxes were just sufficient to finance by themselves the government's revenue need, first-best results could be obtalned with no distortionary costs of environmental taxes. However, the question remained open as to the distortionary properties of environmental taxes when there are other taxes and environmental taxes, by themselves, are insufficient to meet the revenue need. Dealing with this latter case, Kaplow as well as Fullerton and Metcalf found some nondistortionary properties of environmental taxes. This article identifies another nondistortionary property of environmental taxes, namely, that the corrective, Pigovian parts of environmental taxes have no corresponding Harberger triangles whether or not there are other taxes. (The result does not extend to proportional taxes on nonexternalities because it depends on a defining characteristic of externalities.) The nondistortionary property of missing Harberger triangles is shown for a very simple model, but it extends to more general settings in Page and Zhang (2003). The model is similar to ones by Sandmo, by Parry, by Bovenberg and de Mooij (1994), and more closely related to Kaplow and to Fullerton and Metcalf. This article differs from the above cited papers in identifying the miss-

Tax Base and Crowding‐in Effects of Balanced Budget Fiscal Policy

AbstractA dynamic general equilibrium business cycle model is constructed with staggered price adjustment, monopolistic wage setting and distortionary taxation. The government purchases goods, runs an unemployment benefit system and balances its budget through a proportional tax on labour income. A temporary tax‐financed increase in government expenditures can lower the tax rate through a demand‐induced widening of the tax base. It is shown analytically that this allows private consumption to rise, under realistic conditions, despite the negative wealth effect of increased fiscal spending.

Income Taxation and Equity

This paper provides an exposition and explanation of the various ways in which value judgements can be instilled into an income tax system, or, if inherent in a pre-existing one, can be drawn out and understood. A putative EU-wide income tax, additional to the national income taxes of the Member States, is used as a vehicle for the analysis. When the identification of equals is done using an appropriate ‘equivalent income function’, and the equal treatment command modelled in terms of it, the resultant tax will in general be differentiated between countries. A supplementary command, “equal progression among equals”, can be achieved if equals are defined as those at the same percentile point in the within-country distributions, and if these distributions differ in logarithms only by location and scale. Differentiated proportional taxes could even be equitable in this scenario, the flat rate being higher in less unequal countries. The value judgements implicit in a given tax system can be exposed in terms of an equivalence scale which is in general “base dependent”.

Stability Consequences of Fiscal Policy Rules

Using an optimisation-based model with endogenous labour supply and a proportional tax rate, we compare the stabilising properties of different fiscal policy rules. The economy is affected by shocks from both government spending and technology. The fiscal policy rule can be based on government liabilities or the government budget deficit. As both are given as measures of fiscal policy performance in the Stability and Growth Pact (SGP), we also use a fiscal policy rule based on the combination of the two. We compare the accounting definition of deficit with the economic definition which takes inflation into account. The fiscal policy rule based on debt, with monetary policy consistent with the Taylor principle, results in an unstable solution. However, a fiscal policy rule based on deficit produces stable solutions with a wide range of fiscal policy parameters. Moreover, we find that putting more weight on the deficit than the debt in the fiscal policy rule creates less cyclical responses to shocks. Finally we find out that the SGP definition of deficit performs as well as the real deficit based on the government budget constraint.

Effects of the Supply-side Channel on Stabilisation Properties of Policy Rules

In this paper we introduce an application of the supply-side channel for fiscal policy to the basic New Keynesian model. We use a proportional tax rate instead of lump sum tax and introduce the distortions of a tax wedge. We derive a closed economy forward-looking model with government consumption and no capital. Households' labour supply decisions are endogenised. Monetary policy is conducted by a Taylor-type interest rate rule and fiscal policy follows a simple debt rule. We analyse the stability of the model when fiscal policy has both demand and supply-side effects and compare results with the standard case of only demand effects. We show that taking supply-side effects into account restricts the fiscal policy parameter range consistent with the dynamic stability of the economy. We also argue that allowing fiscal policy to affect both supply and demand results in more persistent inflation as well as output responses to shocks, than without the supply-side channel. We also discuss the different monetary and fiscal policy regimes and their implication on the stability of inflation and output.

Risk aversion, proportional profit taxes and input demands under uncertainty

Many proposed and current tax policies may impact input use of risk-averse firms. This article examines a risk-averse firm's response to profit taxes under production and output price uncertainty. It extends the literature by providing a framework to examine the impacts of profit taxes on a risk-averse firm's input use under uncertainty. The comparative static results show that although profit tax policies do not have an impact on input use under certainty and risk-neutrality, they impact risk-averse firms’ input use under uncertainty. The impact of the profit taxes on input use depends on the form of production uncertainty, risk-input relationships, risk attitudes, and degrees of output price and production uncertainty. These results have implications for developing and implementing tax and other public policies.