Revenue-neutral Tax Research Articles

The dividends from a revenue neutral tax on coal in South Africa

South Africa is endowed with a significant proportion of the worlds coal reserves, which is used relatively cheaply to supply in more than 75 per cent of the country's energy needs. In terms of its per capita South Africa is one of the largest air polluters in the world. Even higher on the list of social preferences in South Africa, however, is the problem of unemployment, which also ranks amongst the highest in the world. In this paper we use a Computable General Equilibrium (CGE) model to simulate fiscal policy scenarios that address both these problems, and try to establish a double dividend, namely a reduction in CO2 levels of pollution as well as a reduction in unemployment levels.

Employment and Growth Effects of Tax Reforms in a Growth-Matching Model

This paper explores how revenue-neutral tax reforms impact employment and economic growth in models of exogenous and endogenous growth and search frictions on the labor market. We show that (i) a cut in the payroll tax financed by an increase in the wage tax lowers both equilibrium employment and the equilibrium growth rate, that (ii) a higher energy tax combined with a cut in wage taxes boosts employment but has an ambiguous effect on growth, and that (iii) a higher energy tax combined with a cut in payroll taxes enhances employment but mitigates economic growth.

Taxation and Labor Markets

We exploit the common features of models such as union, search and efficiency wage models to develop a framework that can be used to analyze the effects of any revenue-neutral tax reform on employment. In particular, we show that taxes paid by workers are not equivalent to taxes paid by firms when taxes are non linear. Moreover, we show that the positive impact of tax progressivity on employment is attributable only to a limited set of hypotheses.

The Welfare of Investment Deductibility Under a Flat Tax

This paper analyses the welfare effects of investment deductibility in a contest of endogenous growth generated by learning–by–doing and knowledge spillovers. We present a model where a set of revenue neutral fiscal policies, each characterized by different degrees of investment deductibility and different uniform tax rates on income, have been introduced. We show that, given the ratio of public expenditures to national product, partial investment deductibility turns out to be welfare enhancing when the intertemporal elasticity of substitution of consumption is sufficiently small. Our result means that a pure consumption tax—although ensuring more saving and faster growth—is not always preferable to a revenue neutral tax system in which both consumption and investment are taxed.

Tax Reform and Public-Sector Expenditures

This paper examines the economic effects of various fundamental tax reforms in a model with two types of public-sector expenditures; one type contributes to human capital formation while the other provides direct utility to households. We show that a fully-optimal reform requires the government to tax private consumption and adjust its spending to achieve the efficient levels of public investment and public consumption relative to output. Using quantitative simulations, we demonstate that the appropriate size of government can be quite important for efficiency. Revenue-neutral tax reforms (which adjust the tax structure but not the size of government) can miss out on a large portion of the available welfare gain from moving to a consumption-based tax system. Most studies of tax reform abstract from this issue completely because public-sector expenditures are assumed to be entirely wasteful. Our findings are robust to a variety of calibrations for which the optimal size of government can be either smaller or larger than the U.S. baseline. Under some calibrations, imposing revenue-neutrality can nearly erase the efficiency gains from shifting to a consumption tax. Overall, our results highlight the importance of taking into account both sides of the government's budget when assessing the potential benefits of fundamental tax reform.

Ökologische Steuerreform: Im Schacher um die Ökosteuer sind sich zu viele nicht grün

The excellent idea of a revenue-neutral energy tax has been badly implemented by the "red-green" Federal Government of Germany. A reform is urgently required. The tax income collected from households shall be repaid in equal amounts per cent to them ("Eco-Bonus") For industry and commerce a CO2-emission certificate trading shall be installed.

Why Governments Should Tax Mobile Capital in the Presence of Unemployment

Abstract This paper shows that a small open economy that suffers from involuntary unemployment should levy a positive source-based tax on capital income. A revenue-neutral tax reform that increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax reform will lower the marginal cost of production, increase output, reduce unemployment, and increase domestic welfare as long as the labour tax rate exceeds the capital tax rate. The result holds even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, if the elasticity of substitution between capital and labour is above a critical value (which is itself below one). Finally, and importantly, independent of the size of the elasticity of substitution, the government can promote wage moderation and reduce unemployment by increasing the personal tax credit of employed workers instead of reducing the labour tax rate.

The Welfare Of Flat Tax

This paper analyses the welfare effects of flat tax in a context of endogenous growth generated by learning-by-doing and knowledge spillovers. We present a model where a set of revenue neutral fiscal policies, each characterised by different degrees of investment deductibility and different uniform tax rates on income, have been introduced. We show that, given the ratio of public expenditures to national product, partial investment deductibility turns out to be welfare enhancing when the intertemporal elasticity of substitution of consumption is sufficiently small. Our result means that a pure consumption tax $-$ although ensuring more saving and faster growth $-$ is not always preferable to a revenue neutral tax system in which both consumption and investment are taxed.

The impact of tax reforms on unemployment in a SMOPEC

This paper analyzes revenue-neutral tax reforms for a small open economy which is constrained to a balanced current account and whose producers have market power on the world market. We consider origin-based and destination-based commodity taxes as well as taxes on income, the payroll, and on an imported factor of production. Our main findings are the following. First, the strength, and for some parameter constellations, even the sign of the employment effect of tax reforms varies with the degree of openness of the economy. Second, the indeterminacy of the sign of the employment effect crucially hinges on the presence of an internationally mobile factor. The central mechanism underlying our results are adjustments of the real exchange rate which have repercussions on wage and price setting and therefore on employment.

The impact of revenue‐neutral tax policy on plant location under price uncertainty

This research note incorporates price uncertainty into a production- location model and examines the impacts of a revenue-neutral tax policy on production and location decisions. In particular, it is shown that under an assumption of decreasing absolute risk aversion, a revenue-neutral rise in the marginal tax rate increases the firm's output and causes the firm to move its plant closer to (away from) the market center provided that the production function exhibits increasing (decreasing) returns to scale. Nevertheless, the plant location remains unchanged as a result of a revenue-neutral tax policy if the production function is constant returns to scale. A comparison between revenue-neutral and income or lump-sum taxes and hence some important policy implications are also provided in the analysis.

The impact of revenue-neutral tax policy on plant location under price uncertainty

This research note incorporates price uncertainty into a production- location model and examines the impacts of a revenue-neutral tax policy on production and location decisions. In particular, it is shown that under an assumption of decreasing absolute risk aversion, a revenue-neutral rise in the marginal tax rate increases the firm's output and causes the firm to move its plant closer to (away from) the market center provided that the production function exhibits increasing (decreasing) returns to scale. Nevertheless, the plant location remains unchanged as a result of a revenue-neutral tax policy if the production function is constant returns to scale. A comparison between revenue-neutral and income or lump-sum taxes and hence some important policy implications are also provided in the analysis.

Flat tax reform: A quantitative exploration

Abstract This paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the U.S. is replaced by a flat tax, as proposed by Hall and Rabushka (1995) , (The Flat Tax, 2nd ed. Hoover). The central aspects of such reform, the impact of tax reform on capital accumulation and labor supply, as well as its distributional consequences, are analyzed in a dynamic general equilibrium model. Main results are that, (i) the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation; (ii) mean labor hours are relatively constant across tax systems, but aggregate labor in efficiency units increases; (iii) in all circumstances analyzed, the distributions of earnings, income and especially wealth become more concentrated.

Tax incidence under oligopoly: a comparison of policy approaches

This paper presents a methodological approach for the analysis of tax incidence that encompasses familiar forms of taxation in a general and analytically convenient model. In oligopolistic industries, the performance of a tax depends on the sensitivity of the unit tax rate to changes in industry output. Output-elastic tax schedules are less likely to be over-shifted and have superior welfare properties relative to regulatory instruments that are less responsive to the equilibrium market quantity. For revenue neutral tax reforms, the finding of Delipalla and Keen (1992)that ad valorem taxes welfare-dominate specific taxes under oligopoly is derived as a special case of this general result.

The effect of green taxes and carbon tax shifting on the state of Minnesota

Although it is well established that taxes have a distortionary and negative effect on the economy, not all taxes are equally deleterious. This study examines the effect of a revenue neutral tax on Carbon Emissions, using the Energy 2020 and REMI models. The revenue raised by the carbon tax is off-set by corresponding reductions in other taxes (property and payroll taxes). The results indicate that the carbon emissions tax may or may not be as negative to economic growth as the taxes that they replace were. Therefore, it is possible to tax pollution, and only minorly slow or even stimulate the economy

Resource taxation and sustainability: A CGE model of the Czech Republic

Resource use by a country is considered in the context of a production relationship. Resources include natural, produced, and human capital. The taxation of each of these resource groups has an impact on the efficient use of these inputs through changes in the relative prices. A computable general equilibrium model (CGE) of the Czech Republic is used to evaluate the impact that various revenue neutral tax structures have on the allocation of economic activity throughout the economy. A Hicksian welfare measure is used to determine the impact on society’s welfare of revenue neutral shifts in taxes. The results demonstrate that the change in the tax structure will result in a welfare improvement by as much as 5% for the Czech Republic. The results provide insight into the role that “getting the prices right” has on sustainability.

Evaluating tax reforms in a monetary economy

Hypothetical revenue-neutral tax reforms are conducted in a calibrated endogenous growth model in which money serves to economize on the time-costs of transacting. The model includes the cash-in-advance (CIA) and non-monetary frameworks as special cases of the parameterization. The results from our shopping-time model suggest that both the CIA and non-monetary models may somewhat underestimate the welfare benefits of lowering the income tax, while the growth effects of the tax reforms are almost the same across the models. We also examine the transitional dynamics resulting from the tax reforms.

Flat Tax Reform: A Quantitative Exploration

This paper explores quantitatively the general equilibirum implications of a revenue neutral tax reform in which the current income and capital income tax structure in the U.S. is replaced by a flat tax, as proposed by Hall and Rabushka (1995). The central aspects of such reform, the impact of tax reform on capital accumulation, labor supply and welfare, as well as its distributional consequences, are analyzed in a dynamic general equilibrium model where key features of the actual tax code are modelled.

Is Revenue-Neutral Tax Reform Revenue Neutral?

When political factors are taken into account, tax reform intended to be revenue neutral is likely to increase tax revenues. Any reduction in the excess burden of the tax system is likely to increase government revenues because the marginal political cost of tax increases is reduced. Evidence from the 1986 tax reform in the United States and the adoption of the value-added tax in many European countries, where the reforms were claimed to be revenue neutral, is consistent with the hypothesis that "revenue neutral" tax reform generates more government revenue.

Von der Umwelttechnik zur umweltverträglichen Technologie: Eine neue technologische Revolution steht bevor

From Environmental Technology to Sustainable Technologies – A Sweeping Technological Revolution Ahead. Environmental technology was established as a new branch of the modern economy. Half a million jobs are offered in this domain in Germany alone. Under the global criteria of sustainability, however, environmental technology is just not enough. Taking the Climate Convention seriously will force the North to fundamentally change the direction of technological progress, from the increase of labor productivity towards an increase of energy productivity. For this to happen, market signals are a more powerful tool than bureaucratic regulations. Prices should tell the ecological truth. A revenue-neutral ecological tax reform, gradually raising fossil and nuclear energy prices by 5 percent per annum (in constant dollars) would lead within some 40 years to a dramatic increase in both energy productivity and renewables, at the expense of fossil and nuclear energy. A far-reaching technological transformation would ensue. New high-efficiency “sunrise” technologies are bound to emerge. Complex services would gain ground. It is assumed that not all problems can be solved by ecologizing professional labor. Eventually, professional labor may shrink without loss of well-being.

International VAT Harmonization: Macroeconomic Effects

This paper highlights key macroeconomic issues related to VAT harmonization. A model is developed which emphasizes the effects of changes in the time profile of various taxes on international behavior. Dynamic simulations reveal that the macroeconomic and welfare implications of VAT harmonization, including conflicts of interest, depend critically on the tax system and the degree of substitution governing temporal and intertemporal allocations. We also demonstrate that the effects of revenue-neutral tax conversions between income and consumption tax systems undertaken by a single country depend critically on international differences in behavior.