1,280 research outputs found
Age-related optimal income taxation
No full textIn most countries, average income varies with age. In this paper we investigate if and how it is possible to enhance the redistributive mechanism by relating tax payments to age. Using an OLG model where some individuals are low skilled all their life while others are low skilled when young but high skilled when old, we first show how an age dependent optimal income tax can Pareto improve upon an age independent income tax. We then characterize the optimal age dependent income tax. A tax on interest income is part of the optimal tax structure
Nonlinear Income Taxation and Matching Grants in a Federation with Decentralized In-Kind Transfers
No full textWe extend to a fiscal federalism setting the literature on redistributive in-kind transfers in the presence of nonlinear income taxation. Local governments have a cost advantage, motivating decentralization of the in-kind transfer. The cost structure varies across regions, and the central government cannot observe which region is which. We show that decentralized in-kind transfers can, in this setting, be an even more important instrument for relaxing self-selection constraints, thus, helping redistribution, than in single-government models. We characterize the optimal marginal tax rates and matching grants. The grants have a very different structure than the one derived in earlier studies
Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ
No full textPaternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and design policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems devel- oped by Stiglitz (1982) and Stern (1982), the paper provides a char- acterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents
Public Provision of Private Goods and Nondistortionary Marginal Tax Rates
No full textUsing an optimal taxation model combined with a previously neglected scheme of public provision of private goods, we show that there is an efficiency gain if public provision of selected goods replaces market purchases and that efficiency requires marginal income tax rates to be higher than if the goods were purchased in the market. Part of the marginal tax serves the same role as a market price and conveys information about a real social cost of working more hours. It might be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates. (JEL H21, H42, I38)
Optimal Commodity Taxation with Varying Quality of Goods
No full textA standard result in the optimal taxation literature is that, when agents differ in market ability and the government aims at redistributing from high- to low-skilled agents by means of an optimal nonlinear labor income tax and a set of commodity taxes, an optimally designed commodity tax structure should encourage (discourage) the consumption of goods/services that are complement with labor (leisure). In this paper we highlight that, when agents can choose both the quality and the quantity of a given good/service, this standard commodity tax result needs to be qualified. First, we show that it becomes relevant to distinguish between specific and ad valorem taxes/subsidies. Second, whether the standard result holds or not depends on how the concept of labor (leisure) complement is defined, namely, whether it is defined in terms of number of units or in terms of expenditure. We also show that levying specific and ad valorem taxes at opposite signs on a given good can be a feature of the second-best optimum
THE WELFARE GAINS OF AGE-RELATED OPTIMAL INCOME TAXATION
No full textUsing an overlapping-generations model we quantify the gains of an age-dependent labor income tax. Agents face skill uncertainty and can transfer consumption across periods through savings. The total welfare gain of switching from an age-independent to an age-dependent nonlinear tax varies between 2.4% and 4% of GDP. Part of the gain descends from relaxing incentive-compatibility constraints and part is due to capital accumulation effects. The welfare gain is of about the same magnitude as the one that can be achieved by moving from a linear- to a nonlinear income tax. Finally, the welfare loss from tax-exempting interest income is negligible under an optimal age-dependent labor income tax
Public provision of private goods and optimal income taxation with heterogeneity in needs
No full textWhere Should the Elderly Live and Who Should Pay for Their Care?
No full textWe consider a model with a population consisting of earners and retired persons; elderly care is publicly provided. There is one big city, where congestion effects and agglomeration forces are at work, and a number of small villages. We show how the externalities related to population mobility lead to an inefficient spatial distribution of earners and retirees, and we characterize the second-best solution. Decentralization of this solution in a fiscal federalism structure requires the use of taxes and subsidies proportional to the number of earners and retired persons living in the city and the villages. Copyright © The editors of the "Scandinavian Journal of Economics" 2010 .
Pareto efficient income taxation without single-crossing
No full textWe provide a full characterization of a two-type optimal nonlinear income tax model where the single-crossing condition is violated due to an assumption that agents differ both in terms of market abilities and in terms of their needs for a work-related good. We set up a Pareto-efficient tax problem and analyze the entire second-best Pareto-frontier, highlighting several non-standard results, such as the possibility of income re-ranking relative to the laissez-faire and gaps in the Pareto-frontier
Nonlinear and piecewise linear income taxation, and the subsidization of work-related goods
No full textWe investigate how the social welfare gain of subsidizing work-related goods depends on whether the underlying income tax system is linear, piecewise linear or fully nonlinear, focusing on child care services as a paradigmatic example of goods/services that are complements with labor supply. Our quantitative analysis employs an empirically relevant labor supply model and shows that the welfare gain of an optimally chosen subsidy is negligible when the optimal income tax is restricted to be linear but about the same as under fully nonlinear taxation when the optimal income tax is restricted to be piecewise linear. Our findings enhance the policy relevance of the optimal tax argument in favor of providing subsidies to work-related goods and also shed light on the relative welfare gains of employing piecewise linear rather than fully nonlinear income taxes
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