uncertainty and optimal taxation in defense of commodity taxes abstract this paper re examines the theory of optimal commodity taxation in the presence of a linear income tax under wage uncertainty there are two categories of goods the consumption levels in one group are committed to before the resolution of uncertainty and those of the other after the paper i characterizes the structure of the optimal commodity taxes in view of the insurance they provide against random wage movements ii proves that optimal taxation requires a mix of differential commodity taxes and a uniform lump sum tax and iii demonstrates that the post uncertainty goods should face a positive tax rate which is higher than the tax rate on the pre committed goods

nonpecuniary benefits to farming implications for supply response to decoupled payments we develop a household model wherein farmers allocate labor to maximize utility from leisure consumption and nonpecuniary benefits from farming the model shows that farmers with decreasing marginal utility of income respond to higher decoupled payments by decreasing off farm labor and increasing farm labor resulting in greater agricultural output we then estimate the difference between farm and off farm returns to labor using data from three nationally representative farm household surveys the finding of a large on farm off farm wage differential provides compelling evidence of substantial nonpecuniary benefits from farming

modeling charitable giving using a box cox standard tobit model there is a large literature investigating the determinants of charitable giving in particular price and income elasticities we find that many of the most often reported results from this literature rely on a model specification that is inappropriate when applied to recent federal tax file data we develop a standard tobit model with a box cox transformation parameter that nests a number of other specifications the box cox model yields estimates of price elasticities and expected charitable contributions that differ from those obtained using the typical specification additionally we find that the use of sample weights provides potentially important policy insights copyright 1991 by mit press

the higher returns to formal education for entrepreneurs versus employees how valuable is formal education for entrepreneurs income relative to employees and if the income returns to formal education are different for entrepreneurs vis a vis employees what might be a plausible explanation to explore these questions we analyze a large representative us panel we show that entrepreneurs have higher returns to formal education than employees we refer to this as the entrepreneurship returns puzzle we run post hoc analyses to explore a number of potential explanations of this puzzle indirectly our analysis indicates that the higher returns to formal education for entrepreneurs might be due to the fewer organizational constraints they face leading to more personal control over how to use their human capital compared to employees

inflation financial markets and long run real activity abstract empirical evidence suggests that real activity the volume of bank lending activity and the volume of trading in equity markets are strongly positively correlated at the same time inflation and financial market activity are strongly negatively correlated in the long run as are inflation and the real rate of return on equity inflation and real activity are also negatively correlated in the long run particularly for economies with relatively high rates of inflation we present a monetary growth model in which banks and secondary capital markets play a crucial allocative function we show that at least under certain configurations of parameters the predictions of the model are consistent with these and several other observations about inflation finance and long run real activity

taxpayer responses in good times and bad abstract i show that the magnitude of taxpayer responsiveness a key parameter in public finance varies through time using linked administrative data and identifying responses from changes in notches i document a marked decline in responsiveness during the great recession that cannot be explained by increased enforcement i characterize which employee employer pairs are best at reporting tax advantaged incomes workers in industries with above average responsiveness such as construction were disproportionately affected by the recession i show responsiveness also declined for workers who remained matched with the same employers throughout the period

financial fragility and the exchange rate regime abstract we study financial fragility exchange rate crises and monetary policy in a model of an open economy with diamond dybvig banks the banking system the exchange rate regime and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare if the mechanism fails banking crises and speculative attacks on the currency become possible we compare currency boards fixed rates and flexible rates with and without a lender of last resort a currency board cannot implement a social optimum in addition it allows bank runs to occur a fixed exchange rate system may implement the social optimum but is more prone to bank runs and exchange rate crises than a currency board a flexible rate system implements the social optimum and eliminates runs provided that the exchange rate and credit policies of the central bank are appropriately designed journal of economic literature classification numbers f3 e5 g2

tax evasion and inequality this paper attempts to estimate the size and distribution of tax evasion in rich countries we combine random audits the key source used to study tax evasion so far with new micro data leaked from large offshore financial institutions hsbc switzerland swiss leaks and mossack fonseca panama papers matched to population wide wealth records in norway sweden and denmark we find that tax evasion rises sharply with wealth a phenomenon random audits fail to capture on average about 3 of personal taxes are evaded in scandinavia but this figure rises to close to 30 in the top 0 01 of the wealth distribution a group that includes households with more than 45 million in net wealth a simple model of the supply of tax evasion services can explain why evasion rises steeply with wealth taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly highlighting the need to move beyond tax data to capture income and wealth at the top even in countries where tax compliance is generally high we also find that after reducing tax evasion by using tax amnesties tax evaders do not legally avoid taxes more this result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the very wealthy

the distribution of abilities and the progressive income tax abstract this paper develops a model of endogenous labor supply where agents are uncertain about their future wages assuming risk aversion some redistributive taxation is thus warranted it is shown that for a particular parameterization of the tax system an optimally progressive income tax exists comparative ststics analysis demonstrates how this tax system is effected by changes in the wage distribution the paper ends with a discussion of whether an optimally progressive income tax can be politically sustained it is shown that generally this is not the case in a political system with majority voting

the private financial gains to entrepreneurship is it a good use of public money to encourage individuals to become entrepreneurs recent evidence comparing earnings from entrepreneurship versus wage earning shows that after allowing for obvious observable differences most entrepreneurs in most developed countries earn less than similar wage earning employees does this mean that the decision to become an entrepreneur should be discouraged the answer depends in part on whether we believe that entrepreneurs report their income truthfully or not adjusting for what is considered to be underreporting by entrepreneurs lifts entrepreneurial earnings by between 10 and 40 reversing the fortunes of the entrepreneur such that they appear to be earning much more than their counterparts in a wage earning job if this adjustment should prove to be appropriate then there is no obvious reason to increase the incentive for individuals to become entrepreneurs such as with tax breaks or direct start up subsidies in developed countries and there is reason instead to discuss decreasing these subsidies

estimating tax noncompliance with evidence from unaudited tax returns this article estimates the degree of tax noncompliance using evidence from unaudited tax returns measurements of noncompliance are derived from the relationship between reported charitable contributions and reported income from wages and salary as compared to alternative reported income sources such as self employment farm and other small business income assuming that the source of one s income is unrelated to one s charitable inclinations and that the ratio of true income to taxable income does not vary by income source any difference in the relationship between charitable contributions and the source of income can be attributed to relative underreporting by the individual we find that the implied amount of noncompliance is significant and that it varies by source of income as well as between positive and negative values of each type of income tax evasion creates horizontal inequity and if opportunities for evasion are correlated with income complicates the attempt to achieve vertical equity evasion also imposes economic costs because taxpayers expend resources to facilitate evasion and the tax agency expends resources to contain it the equity and efficiency implications of tax evasion and optimal policy to address it depend on its magnitude and nature which for obvious reasons is difficult to ascertain this article contributes to that effort by developing a new method for estimating the extent and nature of tax noncompliance based on evidence from unaudited tax returns this evidence is derived from the relationship between reported charitable contributions and reported taxable income from various sources such as wages and salaries selfemployment nonfarm small business and farm income and is based on the assumptions that the source of one s income is unrelated to one s charitable inclinations and that the ratio of true income to taxable income does not vary by income source we find that the implied amount of noncompliance on non wageand salary income is substantial and that it varies among these sources of income as well as between positive and negative values of each type of income on average reported positive self employment nonfarm small business and farm income must be multiplied by a factor of 1 54 4 54 and 3 87 respectively in order to obtain true income even those individuals who report zero income for a specific income source but file the schedule for that source are estimated to have true positive income finally those households that report negative schedule income may actually have greater true income than those households that report positive income

an expenditure based estimate of britain s black economy abstract we estimate the size of britain s black economy defined narrowly as unreported taxable income by using income and expenditure data drawn from the 1982 family expenditure survey our working assumptions are that all income groups report expenditure on food correctly employees in employment report income correctly and that the self employed under report their income we estimate food exependiture equations for all groups and then invert them to arrive at the conclusion that on average true self employment income is 1 55 times as much as reported self employment income this implies that the size of the black economy is about 5 5 percent of gdp

reducing evasion through self reporting evidence from charitable contributions abstract in absence of third party reporting taxpayers are required to self report information with various degrees of detail ranging from uncorroborated claims to comprehensive records with receipts using a quasi experimental design applied to noncash charitable contribution deductions i show that even basic self reporting requirements are effective at reducing evasion but impose large compliance costs on taxpayers i find that simplified reporting requirements reduce reporting costs by 55 per person and substantially increase claimed donations however half of the new donations are due to evasion thus information reporting should only be imposed on total reported donations above a pre specified threshold

optimal grouping of commodities for indirect taxation indirect taxes contribute to a sizeable part of government revenues around the world typically there are few different tax rates and the goods are partitioned into classes associated with each rate the present paper studies how to group the goods in these few classes we take as given the number of tax rates and study the optimal aggregation or classification of commodities of the fiscal authority in a second best setup the results are illustrated on data from the united kingdom

myth and reality of flat tax reform micro estimates of tax evasion response and welfare effects in russia we examine the effects of russia s 2001 flat rate income tax reform on consumption income and tax evasion we use the gap between household expenditures and reported earnings as a proxy for tax e

indivisible labor lotteries and equilibrium abstract this paper considers an economy where labor is indivisible and agents are identical although the discontinuity in labor supply at the individual level disappears as a result of aggregation it is shown that indivisible labor has strong consequences for the aggregate bahavior of the economy it is also shown that optimal allocations involve lotteries over employment and consumption

estimates of the black economy based on consumer demand approaches we propose a consumer demand system approach to estimating the size of the black economy where alternative hypotheses affecting the empirical results can be tested in a nested framework this approach allows for the estimation of the under reporting of household income from various sources dispensing with the need to use arbitrary criteria to classify households by their main source of income it also avoids potential bias in black economy estimates arising from mistaking preference heterogeneity substitution as income effects we illustrate these arguments by estimating the extent to which self employment income in the uk is underreported using parametric and nonparametric techniques the black economy broadly defined as the economic activities that are hidden from public authorities to avoid taxation has recently received increased attention in the literature due to arguments that the rising tax burden and state regulation is driving economic activity underground tanzi and schuknecht 1997 enste and schneider 1998 the usefulness of attempts to estimate the size of the black economy however is a controversial issue the sceptics emphasise the difficulties associated with the precise definition of black economy activities and point to the widely different estimates of the size of these activities resulting from alternative methods dixon 1999 tanzi 1999 thomas 1999 authors approaching the subject in an optimistic frame of mind emphasise positive aspects of estimating the size of the black economy such as the correct measurement of gdp and other macroeconomic variables e g employment and the design of policy and econometric models bhattacharyya 1999 giles 1999 the controversy on estimation issues however does not subtract from the widespread concern about the undesired consequences of the black economy undeclared economic activities reduce the tax base thereby undermining the financing of public goods and social protection a country trying to curtail the loss of tax revenue by raising tax rates can create a vicious cycle as this reinforces the incentive not to declare economic activities to the public authorities high tax rates have a distorting effect resulting in inefficient allocation of resources due to unequal opportunities and willingness to evade in different sectors of the economy and can undermine the ability of the country to compete internationally distortions in the labour market can also arise because individuals working in the black economy may have difficulty in moving from one job to another furthermore in countries where health pension and other social security payments are not universal individuals working in the black economy and their families are outside the

is commodity taxation unfair abstract in a model where agents have unequal skills and heterogeneous preferences about consumption goods and leisure this paper studies how to combine commodity taxes and non linear income tax it proposes a particular social welfare function on the basis of fairness principles it then derives a simple criterion for evaluating the social welfare consequences of various tax schedules under the proposed approach the optimal tax should have no commodity tax for some range of consumptions and income redistribution would feature high subsidies to the working poor it is also shown that even when the income tax fails to be optimal commodity taxes may not improve social welfare

are estimated tax elasticities really just tax evasion elasticities the case of charitable contributions this paper uses data from tax returns that have been subject to intensive audits to confront the quantitative importance of misreporting for the estimated tax responsiveness of charitable contributions it concludes that the tax responsiveness of charitable giving that has been detected using tax return data cannot be ascribed to the tax responsiveness of overstating actual giving in fact overstatement is apparently less price responsive than actual giving implying that the responsiveness of actual giving is higher than is suggested by studying reported contributions copyright 1989 by mit press

when to dollarize implicit in the debate over dollarization are two very different views of the sequencing of policy measures one view is that dollarization to work smoothly and yield more benefits than costs must wait on the completion of complementary reforms the other view is that dollarization need not wait on these other reforms because the very act of dollarizing will produce the changes needed to smooth the operation of the new regime in this paper i consider these arguments as they apply to the cases of labor market reform fiscal reform and financial sector reform i conclude that neither theory nor evidence suggests that removing all scope for an independent monetary policy will necessarily accelerate the pace of reform

efficient committed budget for implementing target audit probability for many inspectees strategic models of auditor inspectee interaction have neglected implementation details in multiple inspectee settings with multiple inspectees the target audit probability derived from the standard analysis can be implemented with sampling plans differing in the budgets committed to support them overly committed audit budgets tie up unneeded resources that could have been allocated for better uses this paper studies the minimum committed budget required to implement a target audit probability when i the audit sample can be contingent on red flags due to signals of inspectees private information e g from self reporting and ii the number of inspectees is large it proposes an audit rule called bounded simple random sampling srs which is shown to require no more committed budget to support than two other rules naturally generalized from the one to one analysis when the number of inspectees is large enough bounded srs is nearly as good as any efficient audit rule which demands the lowest committed budget necessary to implement the target audit probability the results offer insights on how audit sampling plans may be formulated to reduce inefficiency and what budget usage ratios should be expected accordingly

optimally uniform commodity taxes taste differences and lump sum grants abstract optimal commodity taxes for an economy with many households should be at a uniform proportional rate under certain conditions these include i linear and parallel engel curves with intercepts dependent on household composition ii separability between goods and labour and iii optimal demogrants

taxation as insurance and the case of rate differentiation according to consanguinity under inheritance taxation abstract does there exist an economically convincing reason for differentiating tax rates according to consanguinity as it is the rule under inheritance taxation in most western countries many writers have answered this question in the negative in this paper inheritance expectations are treated like income expectations as in friedman 1957 they fall into a permanent and a transitory component if people take the permanent one as known and the transitory one as random then an insurance theoretic argument can be made for progressive taxation in general and rate differentiation according to consanguinity under inheritance taxation in particular

funding self employment the role of consumer credit this paper investigates whether self employed households use consumer loans in particular installment loans and overdrafts to finance business activities controlling for financial and non financial household variables the authors show that self employed households particularly use personal overdrafts significantly more often than employee households when analyzing the correlation between consumer loan take ups and consumption of self employed in comparison to employee households the authors find first evidence that overdrafts are used by self employed to finance their business as well this indicates that intermingling constitutes a financing strategy when regular business loans may not be accessible this paper is structured as follows section one gives introduction section two reviews previous empirical research results and outlines research agenda section three details the methodology section four presents the results of the empirical analysis section five reviews the limits of the study and makes recommendations for future research finally conclusions are provided in section six

cheating ourselves the economics of tax evasion no government can announce a tax system and then rely on taxpayers sense of duty to remit what is owed some dutiful people will undoubtedly pay what they owe but many others will not over time the ranks of the dutiful will shrink as they see how they are being taken advantage of by the others thus paying taxes must be made a legal responsibility of citizens with penalties attendant on noncompliance but even in the face of those penalties substantial tax evasion exists and always has the history of taxation is replete with episodes of evasion often notable for their inventiveness during the third century many wealthy romans buried their jewelry or stocks of gold coin to evade the luxury tax and homeowners in eighteenth century england temporarily bricked up their fireplaces to escape notice of the hearth tax collector webber and wildavsky 1986 p 141 this essay reviews what is known about the magnitude nature and determinants of tax evasion with an emphasis on the u s income tax alm 1999 andreoni erard and feinstein 1998 and slemrod and yitzhaki 2002 offer more comprehensive recent reviews of the literature it then places this information into a conceptual and policy context

tax evasion and swiss bank deposits bank deposits in jurisdictions with banking secrecy constitute an eective tool to evade taxes on interest income a recent eu reform reduces the scope for this type of tax evasion by introducing a source tax on interest income earned by eu residents in switzerland and several other jurisdictions with banking secrecy in this paper we estimate the impact of the source tax on swiss bank deposits held by eu residents while using that non eu residents were not subject to the tax to apply a natural experiment methodology we nd that the 15 source tax caused swiss bank deposits of eu residents to drop by more than 40 with most of the response occurring in two quarters immediately before and after the source tax was introduced the estimates imply an elasticity of swiss deposits with respect to the net of source tax rate in the range 2 5 3

an empirical test for tax evasion this paper develops a methodology that uses microeconomic data from individual tax returns to test for the presence of tax evasion the test is then applied to a large sample of taxpayers drawn from the u s treasury tax file for 1977 the frequency of evasion indicated by the test is significantly greater than zero and within the wide range that other evidence suggests is the extent of evasion the associations between evasion and characteristics of the taxpayer such as marginal tax rate income age and marital status are also investigated and compared to the findings of earlier studies

measuring income tax evasion using bank credit evidence from greece we document that in semiformal economies banks lend to tax evading individuals based on the bank s assessment of the individual s true income this observation leads to a novel approach to estimate tax evasion we use microdata on household credit from a greek bank and replicate the bank underwriting model to infer the banks estimate of individuals true income we estimate that 43 45 of self employed income goes unreported and thus untaxed for 2009 this implies 28 2 billion of unreported income implying forgone tax revenues of over 11 billion or 30 of the deficit our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods primary tax evading industries are professional services medicine law engineering education and media we conclude with evidence that contemplates the importance of institutions paper trail and political willpower for the persistence of tax evasion jel codes g21 h22 h24 h26 p37

charitable giving in the german welfare state fiscal incentives and crowding out there are two ways that government activities influence private charitable giving 1 government spending on the provision of public goods may cause crowding out of private charitable contributions and 2 tax incentives may boost private charitable giving from a sample of german income tax returns we estimate the elasticity of charitable giving relative to tax incentives income and government spending using censored quantile regression analysis we derive results for different points of the underlying distribution of charitable giving evaluating overall treasury efficiency the tax deductibility of charitable donations fosters enough private giving to offset foregone tax revenues

income uncertainty and optimal redistribution 1 introduction redistribution policy under a utilitarian criterion aims to transfer dollars from one group in the population to another if the weighted utility gain to the recipients exceeds the utility cost to the donors under diminishing marginal utility of income part of any exogenous change in one group s income should be shared with the other group for example if taxpaying workers suffer a negative shock to their mean earnings then part of this utility shock should be spread to nonworkers in the form of lower transfer payments and vice versa for the case of a positive shock this article demonstrates the counterintuitive result that under reasonable preference representations a policymaker may respond optimally to a negative utility shock by redistributing income away from the harmed group thus exacerbating the group s utility loss in particular under risk aversion a mean preserving increase in the variance of income typically has an effect on well being analogous to a decrease in mean income 1 it may nevertheless be welfare enhancing to transfer income away from those suffering an increase in income uncertainty even though this policy compounds their welfare loss the main ideas can be demonstrated in a simple framework for illustration the analysis will focus on redistribution from taxpaying workers to nonworkers the central result is that a meanpreserving increase in earnings uncertainty among taxpayers can increase optimal transfer amounts to nonworkers increasing optimal income replacement rates even though the redistribution exacerbates the taxpayers utility loss from the increase in uncertainty 2 model footnote 1 many factors in the economy affect earnings uncertainty even conditional on being employed such as the form of compensation e

keeping it off the books an empirical investigation of firms that engage in tax evasion this article uses a unique dataset that contains detailed information on firms from around the world to investigate factors that affect under reporting behaviour the empirical strategy employed exploits the nature of the dependent variable which is interval coded and uses interval regression which provides an asymptotically efficient estimator provided that the classical linear model assumptions hold these assumptions are investigated using standard diagnostic tests that have been modified for the interval regression model evidence is presented that shows that the firms in all regions engage in under reporting regression results indicate that government corruption has the single largest causal effect on under reporting resulting in the percentage of sales not reported to the tax authority being 51 3 higher taxes have the second single largest causal effect on under reporting resulting in the percentage of sales not reported to the tax authority being 18 0 higher followed by access to financing

does credit card information reporting improve small business tax compliance we investigate the response of small businesses operating as sole proprietorships to form 1099 k an information report introduced in 2011 which provides the internal revenue service with information about electronic sales e g credit card sales the overall impact of the policy appears to be relatively small however theory and distributional analysis isolates a subset of taxpayers expected to be especially sensitive to reporting who report receipts equal to or slightly exceeding the receipts reported on 1099 k among this set of taxpayers information reporting induced more complete tax reporting 30 of sensitive taxpayers filed a return declaring business income for the first time and among those that were already filing we estimate an increase in reported receipts by up to 24 these taxpayers largely offset increased reported receipts with increased reported expenses which do not face information reporting diminishing the impact on reported net taxable income

predictive analytics and the targeting of audits the literature on audit strategies has focused on random audits or on audits conditioned only on income declaration in contrast tax authorities employ the tools of predictive analytics to identify taxpayers for audit with a range of variables used for conditioning the paper explores the compliance and revenue consequences of the use of predictive analytics in an agent based model that draws upon a behavioral approach to tax compliance the taxpayers in the model form subjective beliefs about the probability of audit from social interaction and are guided by a social custom that is developed from meeting other taxpayers the belief and social custom feed into the occupational choice between employment and two forms of self employment it is shown that the use of predictive analytics yields a significant increase in revenue over a random audit strategy

optimal wage and income taxation with wage uncertainty optimal taxation in a two period model with human capital investment and second period wage uncertainty is analyzed a proportional tax on wages dominates lump sum taxation and the socially optimal level of human capital exceeds that which individuals choose a tax on interest income may raise welfare by encouraging investment in human capital the interest income tax reduces the difference between returns to physical and human capital from individuals inability to reduce human capital risk through diversification a positive interest income tax rate may therefore be optimal even with an optimal wage tax by encouraging m ore investment in human capital copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on environmental taxation under uncertain environmental damage this paper addresses optimal taxation when therelationship between the consumption of a dirty good and the resulting environmentaldamage is uncertain and treated as a randomvariable by policy makers the main purpose isto analyze how increased uncertainty measuredas a mean preserving increase in the spread ofthis random variable affects the optimalcommodity tax on the dirty consumption good incase the only task of government is to correctthe environmental externality and if thepreferences are characterized by nondecreasingabsolute risk aversion we find that thecommodity tax on the dirty consumption goodincreases in response to additionaluncertainty if on the other hand thegovernment provides a public good and uses alump sum tax in addition to the commodity tax it is possible that the commodity tax decreasesas a response to additional uncertainty evenif the preferences are characterized bynondecreasing absolute risk aversion a similarresult emerges although for different reasons if the lump sum tax is replaced by a laborincome tax

minimum wage and tax evasion theory and evidence the paper investigates the role of the minimum wage in a competitive economy in which there is underreporting of earnings by employed labour the minimum wage induces higher compliance by some lowproductivity workers and transforms a nominally neutral scal system into a regressive one a spike in the wage distribution at the minimum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross country data for europe a further result is that employees whose o cially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income this prediction nds support in an empirical test using the massive increase in the minimum wage that took place in hungary in 2001 as a quasi natural experiment

a signaling explanation for charity this article examines a novel but plausible motive for charitable giving charitable donations which are observable can signal wealth or income the signaling equilibrium of charitable donations has attractive properties donations increase proportionally with population size governmental funding for public goods affects private charity only through an income effect crowding out need not be complete income redistribution is generically nonneutral increasing the spread between the poorest and richest person in a community tends to increase private donations our theory are based on the assumption that people are willing to make charitable donations even if they will not increase provision of the public good the data on charitable giving support the hypothesis that donors donate at least partly for signaling purposes rather than only to aid the recipient or to obtain satisfactions unrelated to status though charitable organizations usually report donations within categories thus not allowing perfect revelation for analytical tractability we shall consider an equilibrium with perfect revelation and a continuum of types as characterized in george j mailath 1987 and norman j ireland 1994

optimal taxation in a habit formation economy abstract this paper studies habit formation in consumption preferences in a dynamic mirrlees economy we derive optimal labor and savings wedges based on a recursive approach we show that habit formation creates a motive for subsidizing labor supply and savings in particular habit formation invalidates the well known no distortion at the top result we demonstrate that the theoretical findings are quantitatively important in a parametrized life cycle model average labor and savings wedges fall by more than one third compared with the case of time separable preferences

introduction context issues and contributions from the asian financial crisis the russian default and the brazilian devaluation argentina s president menem recommended that his country officially replace the peso with the u s dollar motivating this proposal was a desire to strengthen the credibility of argentine monetary arrangements although argentina had maintained a currency board since 1991 interest rate differentials between peso denominated and dollar denominated debt widened during periods of financial turmoil indicating that the market perceived a significant probability of devaluation menem s proposal which closely followed the successful inauguration of the european monetary union stirred interest throughout the americas particularly in mexico and a year later in ecuador to some dollarization in mexico offered a guarantee against periodic peso devaluation and seemed a reasonable adjunct to the north american free trade agreement others howevel cited four years of relatively low exchange rate volatility and a reduction in the mexican inflation rate as support for current arrangements an independent central bank and a floating peso ecuador s president jamil mahuad announced his intentions to dollarize in january 2000 as a means of restoring monetary credibility to a battered economy although 80 percent of ecuadorian assets are already dollar denominated the decision prompted rioting these events illustrate the importance of a perennial question in open economy macroeconomics what type of monetary and exchange rate arrangements best promote the economic welfare of a country robert mundell 1961 first posed the question when he attempted to define an optimal currency area oca his work produced a rich debate within the economics profession ishiyama 1975 but seemed to have only a tangential influence on the policy debates of the 1960s and 1970s a period of limited international capital mobility as capital mobility in

compliance with endogenous audit probabilities in this paper we study the effect of endogenous audit probabilities on reporting behavior in a face to face compliance situation such as at customs in an experimental setting in which underreporting has a higher expected payoff than truthful reporting we find an increase in compliance of about 80 percent if subjects have reason to believe that their behavior towards an officer influences their endogenous audit probability higher compliance is driven by considerations about how their own appearance and performance affect their audit probability rather than by the social and psychological effects of face to face contact

uncertainty and optimally uniform commodity taxes this paper examines the implications of uncertainty for the structure of optimal commodity taxes in the presence of a linear income tax consumers face uncertain income and commit to consumption of some goods before the resolution of uncertainty and to others after preferences are separable between labor and consumption goods we prove that optimal commodity taxes are i uniform within the category of noncommitted goods if their subutility is logarithmic ii uniform within the two categories if both subutilities are logarithmic and iii nonzero across categories with the tax rate on precommitted goods being lower than the tax rate on noncommitted goods starting with atkinson and stiglitz 1976 a number of economists have argued that under certain restrictions on preferences e g logarithmic a linear income tax is a sufficient tool for optimal tax policy see atkinson 1977 deaton 1979 and deaton and stern 1986 recently cremer and gahvari 1995a showed that these results do not carry to an economy in which individuals face wage uncertainty in models with uncertainty taxation is useful for the insurance it provides if consumption takes place both before and after the resolution of uncertainty commodity taxes will have different insurance properties depending on when consumption occurs this property makes differential tax treatment of these two types of goods optimal cremer and gahvari 1995a divided commodities into two categories the consumption levels in one category are committed to before the resolution of uncertainty and those in the other after their study pinpoints a fundamental difference between these categories of goods that calls for their tax treatment to be different however their analysis leaves open the question of the uniformity of tax rates within each category the main aim of the current paper is to address this question we shall examine the type of preferences for which the tax rates within each category have to be uniform in this way we will build a bridge between the results of cremer and gahvari 1995a and the literature on uniform taxation in the presence of a linear