Tax Schedule Research Articles

Gathering support for green tax reform: Evidence from German household surveys

Green tax reform is unpopular because, typically, the poor are hurt most by the higher prices of carbon-intensive commodities. If revenues from a carbon tax are recycled, it may be feasible to gain popular support for green tax reform. To investigate this, we estimate an EASI demand system from German household data and a labour supply schedule, using wage data, and the German income tax schedule and let emission intensities decline in the carbon tax. If the revenue from a carbon tax is recycled via a lump-sum transfer to all households, this gives more equitable albeit less efficient outcomes, yet 70% of households are worse off. If the revenue is recycled via lower income taxes, there is more efficiency at the expense of more inequality, and about half of households benefit. With a recycling mix of lump-sum transfers and lower income taxes, popular support can be mustered without hurting equity too much. We also investigate the effects of Germany meeting its legal target for curbing emissions by 55% in 2030 relative to 1990 levels. We find that most of emission reductions are due to producers responding by lowering emission intensities rather than by consumers to less carbon-intensive consumption categories.

Majority Voting, Progressive Taxation, and Income Inequality

ABSTRACT A challenge for the political economy literature is why the average tax rate becomes less progressive while wage inequality increases with the skill premium. This paper contributes to the literature by developing a majority voting equilibrium model in which households choose their most preferred tax schedule under increasing inequality. We find that majority voting favors a marginal tax rate to fund transfers, where the average tax rate increases with income, when the median skill level lies below the mean skill level. The average tax rate becomes less progressive when required government revenue relative to mean skill increases. These findings reconcile the literature with recent empirical trends and are robust to relaxing the assumptions of exogenous government spending and endogenous labor supply.

Voting over selfishly optimal income tax schedules with tax-driven migrations

Voting over selfishly optimal income tax schedules with tax-driven migrations

Optimal Income Taxation: Mirrlees Meets Ramsey

We explore the optimal shape of the income tax and transfer schedule in an environment with distinct roles for public and private insurance. In a calibration to the United States, we find that the optimal system features marginal tax rates that increase in income. When we increase pressure on the government to raise revenue, the optimal marginal tax schedule becomes first flatter and then U-shaped, reconciling various findings in the literature. A power function parametric tax schedule outperforms an affine one, indicating that tax progressivity is more important than lump-sum transfers. We also explore various social welfare objectives and Pareto-improving reforms.

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Optimal tax problems with multidimensional heterogeneity: a mechanism design approach

We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.

Optimal taxation with multiple dimensions of heterogeneity

This paper develops a general theory of optimal income taxation with multiple dimensions of agent heterogeneity. The main technical hurdle in developing this theory is the possibility that individuals have multiple optimal incomes. Using a perturbation approach, we derive optimal tax formulas that account for the possibility that individuals have multiple optima and, hence, account for the possibility that individuals jump between their optimal income levels when we perturb the tax schedule. We quantify the magnitude of these effects, thereby augmenting the optimal tax formulas from Saez (2001) with additional “jumping effect” terms. We provide a partial characterization of when individuals with multiple optimal incomes may exist under the optimal tax schedule. Finally, we derive a new methodology to simulate optimal income tax schedules with multidimensional heterogeneity. We implement this method numerically, showing that individuals with multiple optimal income levels can exist under the optimal tax schedule.

Heterogeneous Workers and Federal Income Taxes in a Spatial Equilibrium

We study the geographic incidence and efficiency of an income tax by estimating a spatial equilibrium model with heterogeneous workers. The US income tax shifts households out of high-productivity cities, leading to locational inefficiency of 0.25 percent of output. Removing spatial tax distortions increases inequality because more educated households are more mobile and own larger shares of land. Flattening the tax schedule, or introducing cost-of-living adjustments or local wage adjustments leads to efficiency gains but causes substantial increases in inequality. Differences in mobility and land ownership across skill groups create an equity-efficiency trade-off that is unique to spatial settings. (JEL H24, H22, D31, J31, J24, R23)

Understanding the elasticity of taxable income: A tale of two approaches

This paper conducts the first formal comparison of two main approaches (tax reform versus bunching approach) to estimate the elasticity of taxable income (ETI), a central parameter in the public finance literature since Feldstein (1999). Using a novel panel of administrative tax data from China and exploiting China’s progressive monthly wage income tax schedule and a tax reform in 2011, we document two key differences in the ETI estimates obtained from these two approaches. First, the tax reform ETI estimates increase concavely over time, while the bunching ETI estimates are much more stable. Second, the tax reform ETI estimates (around 4 in the long-run) are much larger than the bunching ETI (around 0.5), and the difference is statistically significant. To account for these facts, we develop a simple model where individuals in each period have some probability to permanently change hours of work without paying other costs but can temporarily adjust hours by paying additional costs. With stable wage rates, the two estimators should converge to the same underlying value. But with normal wage growth, the tax reform estimates converge to the true underlying parameter, whereas the bunching estimates can be far below the true figure.

Incomplete markets and parental investments in children

The effect of incomplete markets on parental investments is investigated. Uninsured risk and credit constraints can distort the timing of parental investments, causing them to be delayed relative to what would occur under full-insurance. Age-dependent subsidies, taxes or transfers can all possibly correct this. Analytical results are provided, and a numerical life-cycle model provides quantitative results. Data on ability and parental investment dynamics are used to calibrate the model. A sequence of optimal policy experiments is conducted beginning with a simple reform of the tax and transfer schedule and ending with more complex parent-specific tax parameters and investment subsidies, all of which vary with child age. The final experiment generates substantial improvements in the ability distribution and a consumption equivalent welfare gain that is 2.5 times as large as simply reforming the tax schedule. About 1/4 of this incremental gain results from including child-age dependent policies that alleviate distortions of parental investment timing.

Optimal Taxation with Private Insurance

Abstract We derive a fully non-linear optimal income tax schedule in the presence of private insurance. We fill the gap in the literature by studying the optimal tax formula with a comprehensive structure of the private markets—including incomplete markets models—both theoretically and quantitatively. As in the standard taxation literature without private insurance, the optimal tax formula can still be expressed in terms of standard sufficient statistics. With private insurance, however, the formula involves additional terms that reflect how the private market interacts with public insurance. For example, the optimal tax formula should also consider asset distribution and pecuniary externalities as well as the welfare effects of borrowing constraints.

Optimal Taxation of Families: Mirrlees Meets Becker

AbstractThis paper studies optimal taxation of families—a combination of an income tax schedule and child tax credits. Child-rearing requires both goods and parental time, which distinctly impact the design of optimal child tax credits. In the quantitative analysis, I calibrate my model to the US economy and show that the optimal child tax credits are U-shaped in income and decrease with family size. In particular, the optimal credits decrease in the first nine deciles of the income distribution and then increase thereafter. Implementing the optimum yields large welfare gains.

When redistribution makes personalized pricing of externalities useless

AbstractWe consider a standard optimal taxation framework in which consumers' preferences are separable in consumption and labor and identical over consumption, but are affected by consumption externalities. For every nonlinear, income‐dependent pricing of goods there is a linear pricing scheme, combined with an adjusted income tax schedule, that leaves all consumers equally well‐off and weakly increases the government's budget. The result depends on whether a linear pricing scheme exists that keeps the aggregate amount of consumption at its initial level observed under nonlinear pricing. We provide sufficient conditions for the assumption to hold. If adjusting the income tax rate is not available, personalized prices for an externality can enhance social welfare if they are redistributive, that is, favor consumers with a larger marginal social value of income.

Unemployment Insurance Taxes and Labor Demand: Quasi-Experimental Evidence from Administrative Data

To finance unemployment insurance, states raise payroll tax rates on employers who engage in layoffs. Tax rates are, therefore, highest for firms after downturns, potentially hampering labor-market recovery. Using full-population, administrative records from Florida, I estimate the effect of these tax increases on firm behavior leveraging a regression kink design in the tax schedule. Tax hikes reduce hiring and employment substantially, with no effect on layoffs or wages. The results imply unanticipated costs of the financing regime which reduce the optimal benefit by a quarter and account for 12 percent of the unemployment in the wake of the Great Recession. (JEL D22, E24, H25, H32, H71, J23, J65)

Elasticities of taxable income and adjustment costs: bunching evidence from New Zealand

Abstract This article obtains elasticity of taxable income (ETI) estimates using data for NZ over the period, 2001–2017, and using the connection between the ETI and excess bunching at income tax thresholds. Results are reported for the top two thresholds in the tax schedule and for various taxpayer types. Adjustments to tax changes are investigated by comparing ETIs obtained from persistent bunching at thresholds when the tax regime is unchanged, with transitory values associated with specific tax reforms. Results suggest substantial bunching around both tax kinks, with ETIs of around 0.2–0.3 across all taxpayers. Evidence suggests large responses by the self-employed, with ETIs of around 0.8–1.0. No significant differences between males and females were found. Adjustment costs and/or inattention biases associated with a shift in a tax threshold were equivalent initially to around 18% (declining to 6%) of the observed excess mass at the post-reform threshold.

Optimal income taxation with tax avoidance

AbstractWe determine the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is sufficiently small. This contrasts with the results of Grochulski who shows that, using a subadditive cost function, all individuals should report their true income. We also provide a characterization of the optimal income tax curve.

Decentralization and Progressive Taxation

The traditional normative literature on fiscal federalism argues that redistributive policies should be centralized in order to avoid welfare- or tax-induced migration. However, recent evidence shows that even in a setup where the progressivity of the income tax schedule is centralized to an upper-layer government and local governments are involved in tax competition with only a tax shifter, local mobility induces income sorting. Hence, despite centralized redistributive taxation, the resulting effective tax schedule is less progressive than what is set in the tax code. We argue that upper-layer governments anticipate the impact of local income sorting and strategically adjust their statutory tax schedules. We analyze Swiss panel data and apply causal machine learning methods to identify the effects of decentralization on the statutory tax structure. We provide evidence that more decentralized cantons reduce the tax burden for lower and intermediate income classes and hence implement more redistributive statutory tax schedules. This strategic adjustment is limited by the mobility of the tax base.

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Who Should Bear the Burden of COVID-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective

The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

Determining Factors of Smes’ Sales’ Performance —— Case of Togo

By using a cross-firms time-series data of 135 SMEs for the years 2009 and 2016, this paper has identified the determinants and has empirically investigated their impact on corporate performance in Togo. The sample was clustered on SMEs given that no previous studies have focused on this area of research. We have considered in our analysis two categories of determinants including internal and external factors to the SMEs so as to have room for targeted policy recommendations to both corporate managers and the government who administrates and regulates the business environment. To measure the influence of identified determinants on SMEs level of performance, we have first set up a conceptual framework adapted from the Balanced Scorecard model which originally provides a clear prescription as to what companies should measure in order to ‘balance’ their financial perspective. In the basic econometric model that follows, we have used SMEs annual sales, the dependent variable, as a proxy for performance. Results, following the regression –using random effects model – pointed out five variables with high significant impact on SMEs development. We found that in practice, firms with experienced top managers have direct impact on their annual sales. Similarly, banks loans to working capital, manufacturing as well as firms that use internet and sell whole or part of their products to foreign markets enjoy significant positive margin as compared with the rest. On the downside, taxation appeared as one of major obstacles that hamper SMEs growth. Following all above findings, we sensed that both managers, financial institutions and the government have equally high responsibilities to take. Internally, business starters and less experienced managers need to be trained. Programs designed for more interaction and knowledge sharing between managers can mean a way to make them more productive. Despite recent efforts, we argued that external factors including infrastructure, production facilities, tax schedules and the financial environment must feature high in government priority actions to implement.