the deadweight loss from non neutral capital income taxation abstract this paper develops an overlapping generations general equilibrium model that treats explicitly the role of capital goods in the production process and uses the model to measure the relative magnitudes of different distortions associated with capital income taxation across industries assets and time one of the main results is that uniform capital income taxation is almost certainly suboptimal theoritically but that optimal deviations from uniform taxation are empirically inconsequencial the paper also introduces and applies a general technique for distinguishing intergenerational transfers from efficiency gains in the analysis of the impact of policy changes on long run welfare

two sector perspectives on the effects of payroll tax cuts and their financing abstract this paper analyzes the consequences of lifting from labor some of the burden of taxation in a life cycle two sector setup where a consumption good is produced alongside a capital good the analysis focuses on the implications of alternative ways of financing payroll tax cuts in closed and small open neoclassical economies in our models payroll tax cuts do not necessarily stimulate hours worked in the stationary state we show for example that in the closed economy paradoxically long run aggregate labor hours and the capital stock will be reduced if labor tax proceeds are replaced by capital taxation if instead government purchases of the capital good or government labor services are decreased manhours are left unchanged in the long run while capital formation is spurred in the small open economy it is only if the offsets are a fall in entitlement spending or a rise in the wealth tax that aggregate manhours are increased otherwise steady state hours worked are invariant

public funding of higher education abstract recent criticism from different sides has expressed the view that with scarce resources there is little justification for massive public funding of higher education central to the debate is the conjecture that colleges and universities use their resources inefficiently and focus insufficiently on their mission to expand students human potential our aim in this paper is to examine the theoretical premises of this conjecture in a small open economy and uncover the conditions under which public investment in higher education is efficient and desirable we analyze non stationary equilibria of an olg economy characterized by perfect capital mobility intergenerational transfers and a hierarchical education system the government uses income tax revenues to finance basic education and support higher education that generates skilled labor given this the following issues are considered a the impact of education and international markets on the equilibrium number of low skilled and skilled workers in each generation b the economic efficiency of public subsidies to higher education in generating skilled human capital c the endogenous support for a government s educational policies found in a political equilibrium

effects of productivity total domestic product demand and incentive wages on unemployment in a non monetary customer market model of the small open economy a small open economy is studied where the labor market exhibits job rationing owing to the elevated wage induced by the shirking problem with the world product market neoclassical a bad national productivity shock reduces employment and the real wage even in the short run a demand shock is undefined for a country too small to affect price nonnegligibly with the world a customer market employment may rise with the domestic productivity shock before it falls increased foreign demand raises both employment and the relative world price but it does not follow that a general increase of demand raises world employment

the theory of taxation for developing countries tax policy has far reaching implications for economic development and public administration this book which presents a modern theory of public finance brings together many of the most distinguished economists who have written on the subject they provide coherent principles for tax design and a systematic framework for the analysis of practical questions of tax reform and pricing policy in developing countries the book is especially timely as countries experience increasing shortages of government revenue and the distortions brought about by poorly designed tax systems it pays particular attention to the special problems of developing countries such as the taxation of agriculture the aim throughout is to develop techniques that can be quantitatively applied given the data available and empirical case studies illustrate the methods in action the authors analyze the links between tax theory social cost benefit analysis and the pricing of publicly supplied goods and services they also explore the empirical and econometric problems of identifying the tradeoffs between equity and efficiency other topics treated include the analysis of labor markets the taxation of foreign private investment and of fuel and the pricing of education although the models used concentrate on developing countries most of the methods and discussion apply as well to the problems of more affluent countries

public finance of private goods the case of college education this paper describes a contract theory of public finance of college education that explains why everyone pays for the college education of a lucky minority the contract provides gambles that families desire optimizing the contract determines the taxes paid by all members of society fees paid by those whose children go to college the fraction of children who are admitted to college and the quality of college education changes in wealth lead to changes in taxes and admissions but fees and quality are invariant the practice of using a cutoff level of precollege achievement to determine admission to college is justified by the theory

on the taxation of human and physical capital in models of endogenous growth abstract this paper studies the effects of factor income taxation and of subsidies to human capital accumulation in models of endogenous growth it examines in particular how these effects depend on the specification of the leisure activity and on the technology and tax treatment of the sector producing human capital it shows that the negative effects of factor income taxes on economic growth are stronger when the human capital sector is a market good under these circumstances a subsidy to human capital accumulation can offset the direct growth effects of labor taxation making it akin to a consumption tax the paper then briefly discusses the normative implications of the analysis for the optimal taxation of factor incomes

equilibrium income inequality among identical agents the paper offers a theory of income differences in which income inequality exists and persists despite identical tastes and talents teams of unskilled labor supervised by schooled managers produce goods with increasing returns to scale agents are assumed unable to borrow to fund the human capital investment needed to become managers despite ex ante identical agents the model displays the following equilibrium phenomena i risk averse agents accept fair gambles implying an unequal ex post distribution of unearned income ii agents agree to publicly subsidize education although those receiving the subsidy have the highest material wealth and iii income and educational differences are perpetuated from generation to generation

from the static to the dynamic some problems in the theory of taxation abstract this paper considers problems and issues that arise when we attempt to extend the static theory of taxation and production planning to a dynamic context and to combine that theory with theories of growth the reasons dynamic theory is less developed include problems with the analytical tractability of even those dynamic models which attempt to retain the basic structure of the static model furthermore difficult and interesting issues arise in a dynamic context which are either not present or are much less severe in the static theory special attention is paid to these new issues and the difficulties they pose

the behavioral life cycle hypothesis self control mental accounting and framing are incorporated in a behavioral enrichment of the life cycle theory of saving called the behavioral life cycle blc hypothesis the key assumption of the blc theory is that households treat components of their wealth as nonfungible even in the absence of credit rationing specifically wealth is assumed to be divided into three mental accounts current income current assets and future income the temptation to spend is assumed to be greatest for current income and least for future income considerable empirical support for the blc theory is presented primarily drawn from published econometric studies

the efficiency gains from dynamic tax reform this paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general equilibrium rational expectations growth path of life cycle economies the principal findings concern the effects of switching from a proportional income tax with rates similar to those in the u s to either a proportional tax on consumption or a proportional tax on labor income a switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources in contrast a transition to wage taxation generates a loss of greater than percent of lifetime re sources a second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost this abstract was borrowed from another version of this item

investment and shadow pricing in a growing economy with tax restrictions abstract this paper analyses the evolution of investment and shadow prices in a growing economy where government investment must be financed by distortionary taxation it pays particular attention to the sensitivity of this evolution to the sort of shocks that have affected developing countries recently increased debt service and an increased price for energy the analysis is conducted with the help of a numerical model of a dual economy the main policy implications are that it is inappropriate to use time invariant shadow prices in cost benefit analysis that the response of shadow prices to changes in the economic environment may not be unidirectional and that the accounting rate of interest cannot simply be seen as a regulator of investment that responds to shortages of investment finance in addition the paper develops a new approach to the valuation of terminal capital stock in a finite horizon model and shows how the non convexity of second best models can lead to discontinuities in investment

gambles and the shadow price of death recent papers on the value of life involve preferences of the sort introduced by milton friedman and leonard savage 1948 1 given the choice between undergoing a particular gamble in wealth and possessing the mathematical expectation of the payoffs of the gamble the consumers in these studies may prefer the gamble the presence of such risk loving preferences is inferred from two well established facts life is an indivisible commodity in the models and indivisibility leads to preference for gambles the former fact is made clear by philip cook and daniel graham the latter was first noted by yew kwang ng 1965 and is widely known in spite of the obvious connection the implications of risk loving tastes in this area have not been explored this paper examines some implications of such risk loving the idea that indivisibility produces friedman savage preferences and that such preferences create a demand for gambles is extended in section i to a theory of demand for indivisible goods and derived demand for associated optimum gambles this theory suggests that the price of an indivisible good will not compensate for possessing or not possessing the good section ii applies the demand theory to an equilibrium model of labor supply that is relevant to the determination of the value of life in this model the wage diflerential is useful in guiding policy toward public risks in spite of the fact that the differential is not compensating i demand for gambles and demand for goods

commodity taxation with administered and free market prices theory and an application to china abstract this paper analyses commodity taxes in an economy where some production is centrally planned and subject to price controls and some is market determined it shows that backward shifting of taxes can lead to significant distributional effects and demonstrates how these lead to the modification of tax rules the implications of these modifications are analysed using a numerical model based on chinese data significant non uniformity of tax rates is shown to be desirable in a case where standard tax rules imply uniformity the sensitivity of optimal taxes to concern for inequality revenue requirements and food rations are also demonstrated

categorizing risks in the insurance industry this paper analyzes the welfare implications of imperfectly categorizing risks in the insurance industry under conditions of asymmetric information firms initially unable to distinguish the risk type of individuals are provided with imperfect information concerning risk membership the paper then compares various wilson type equilibria to determine the welfare implications of firms imperfectly categorizing risks it is shown that only in the case where the initial equilibrium is of the nash no subsidy type is there a pareto type improvement in welfare

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

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

indivisibilities inferior goods and giffen goods the paper shows how the presence of an indivisible good can cause a divisible good to be inferior and possibly giffen indivisibility is shown to be central to a discussion by j r hicks on inferior goods

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

optimal taxes and the structure of preferences if optimal tax theory is to be the basis for calculating tax rates a close understanding is required of the relationship between the structure of preferences and the configuration of optimal tax rates otherwise hypotheses chosen by the econometrician for practical convenience may completely determine the results independently of measurement this paper explores the relationship between various types of separability particularly weak and implicit separability and optimal tax rates in the various models discussed in the literature the use of distance functions and the antonelli matrix provides a significant unification of previously disparate results in the final analysis optimal tax theory should be the basis for actual calculation of tax rates although recently there have been great advances in theoretical results and in our understanding of their meaning we are still some way from a working knowledge of whether uniform commodity taxes are in practice optimal or if not which commodities should be discriminated against present theoretical formulae do not yield clear cut results except in special cases and it has recently become clear that optimal rates depend crucially on the detailed structure of consumer preferences for example atkinson and stiglitz 3 show that with an optimal nonlinear income tax discriminatory commodity taxes are only necessary to the extent that individual commodities are not weakly separable from leisure more recently deaton 6 has shown that a similar result holds for what is perhaps the most interesting of the standard models that where there are many consumers and only a linear income tax and proportional commodity taxes are allowed in this case separability between goods and leisure together with linear engel curves for goods removes the need for differential commodity taxation in consequence nothing can be learned about commodity taxes from consumer demand studies in which commodity demands are explained conditionally on total expenditure and commodity prices and which assume linear engel curves all such studies require separability from leisure as a maintained hypothesis and so are consistent with uniform commodity taxation these results suggest that the prospects for meaningful empirical calculations of tax rates are bleak econometricians estimating commodity demand and labor supply equations make generous use of separability assumptions to enable estimation at all in consequence it is likely that empirically calculated tax rates based on econometric estimates of parameters will be determined in structure not by the measurements actually made but by arbitrary untested and even unconscious hypotheses chosen by the econometrician for practical convenience to remedy this situation and as a prelude to fruitful empirical work it is necessary to have a more explicit understanding of how preference structure affects optimal tax rates such is the object of this paper three different

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

a tale of two cities and a giffen good a scenario is provided in which a house in eden mills ontario is a giffen good the conditions derived in the example apply to other indivisible goods as well jel classification d11

insurance as a giffen good abstract can insurance be a giffen good this can never happen if the coefficient of relative risk aversion is less than or equal to one if this coefficient is greater than one it is possible but not empirically plausible

replacing the u s income tax with a progressive consumption tax a sequenced general equilibrium approach abstract this paper examines the welfare consequences of changing the current u s income tax system to a progressive consumption tax we compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital in the presence of existing income taxes the u s economy is assumed to lie on a balanced growth path with the change to a consumption tax individuals save more and initially consume less as the capital stock grows consumption eventually overtakes that of the original path and the economy approaches the new balanced growth path with higher consumption and a greater capital stock both the transition and the balanced growth paths enter our welfare evaluations we find the discounted present value of the stream of net gains is approximately 650 billion in 1973 dollars just over 1 percent of the discounted present value of national income larger gains occur if further reform of capital income taxation accompanies the change we examine the sensitivity of the results both to the design of the consumption tax and to the values of elasticity and other parameters the paper also contains estimates of the time required to adjust from one growth path to the other

taxation and savings a neoclassical perspective this paper discusses recent neoclassical analyses of taxation and savings contrary to the popular view that fiscal policy has highly ambiguous impacts on savings neoclassical models admit a host of policies with clear and potentially quite powerful affects on the accumulation of wealth the paper considers four fundamental types of fiscal policies and compares their quantitative affect on savings the essential elements of these policies involve inter and intragenerational redistribution marginal and intra marginal taxation and the level of government consumption conventional accounting measures of taxes spending and deficits provide at best little guide to changes in underlying fiscal instruments and at worst precisely opposite indicators of the direction of such changes indeed the continued use of and concern with conventional fiscal measures is symptomatic of wide spread fiscal illusion these points are developed within the context of certainty models the paper also considers the role of fiscal policy in both mitigating and exacerbating economic risks facing the private sector since precaution is a major motivation for saving governments can greatly influence wealth accumulation either by using fiscal policy to pool private risks or by making fiscal policy itself highly uncertain this abstract was borrowed from another version of this item

optimal taxation of capital income with imperfectly competitive product markets abstract we show that the steady state optimal tax on capital income can be negative positive or zero in a neoclassical growth model that allows for imperfectly competitive product markets the sign of the optimal tax rate depends crucially on 1 the degree of monopoly power 2 the extent to which monopoly profits can be taxed 3 the size of the depreciation allowance and 4 the magnitude of government expenditures for an empirically plausible set of parameters we find that the steady state optimal capital tax can range between 10 and 22

mobility costs frictional unemployment and efficiency with imperfect job information flows it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed with word of mouth communication this condition is derived given this condition steady state equilibrium is not efficient with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral in this way workers become more selective in the jobs they accept

income risk aversion and the demand for insurance the expected utility hypothesis predicts that when the price of insurance is actuarially fair to the consumer a risk averse consumer will choose to fully insure against a potential loss the only role that income can play in affecting the amount of insurance demanded at the actuarially fair price is to affect the size of the potential loss this result is independent of the consumer s degree of risk aversion or how it varies with income however at a price of insurance above or below the actuarially fair level the consumer s degree of risk aversion and its relation to the consumer s income level must be considered if we are to usefully describe consumer behavior mossin 10 showed for a consumer with declining absolute risk aversion and at a price of insurance above the actuarially fair level but below the price at which no insurance will be purchased the optimal amount of insurance demanded against a loss of a given size is inversely related to the consumer s income chesney and louberge 2 noted that mossin s result does not take into account the empirically plausible situation in which higher income consumers may have greater potential losses to insure against they present results concerning the relationship between risk aversion and the level and composition of income in terms of the proportion of income subject to loss and the maximum premium the consumer would be willing to pay for full insurance coverage since their results are in terms of the maximum willingness to pay for full insurance

redistribution and subsidies for higher education the financing of higher education through public spending imposes a transfer of resources from taxpayers to university students and their parents we provide an explanation for this phenomenon those who attend institutions of higher education will earn more income in the future and will pay more taxes people whose children do not receive higher education however should agree to help pay the cost of such education providing that taxes are sufficiently high to ensure an adequate redistribution in favor of their own children at some time in the future

tariff design and reform in a revenue constrained economy theory and an illustration from india abstract this paper develops the theory of design and reform of protective tariffs in a revenue constrained small open economy characterized by learning by doing it shows that revenue raising requires wedges between consumer prices and shadow prices while protection when typically not achievable via subsidies directly targeted towards factor market distortions requires wedges between producer prices and shadow prices illustrative calculations in a modestly disaggregated general equilibrium model of india support the view that uniformity in protective tariffs is likely to be a reasonably good policy in situations where the government intends no discrimination within the sectors already identified for special treatment

the impact of imperfectly categorizing risks on income inequality and social welfare the use of imperfect information to categorize risks is a pervasive and controversial phenomenon in the insurance industry although this activity reduces the average extent of vertical price discrimination it is shown in this paper that both highand low risk types may prefer ex ante to knowing the category to which they will be assigned that such information be suppressed furthermore for the lorenz criterion it is shown that under certain restrictive demand conditions the imperfect categorization of risks leads to an increase in inequality the paper employs the wilson e2 equilibrium concept l impact d une categorisation imparfaite des risques sur l inegalite du revenu et le bien etre social l utilisation de renseignements imparfaits pour categoriser les risques est un probleme important qui porte a controverses dans l industrie de i assurance meme si ce phenomene reduit le degre de discrimination verticale par les prix en moyenne i auteur montre que a la fois les personnes dont le coefficient de risques est faible et elev6 et ce avant de savoir a quelle categorie on va les assigner peuvent fort bien preferer que cette information soit supprimee de plus 1 auteur montre que sous certaines conditions de demande restrictives la categorisation imparfaite des risques conduit a un accroissement du degre d inegalite mesure par le critere de lorenz ce memoire utilise le concept d equilibre dit de wilson e2 if insurance firms are unable to distinguish between the risk types of their clients but consumers know their own probability of loss i e if asymmetric information persists then the complication of adverse selection may arise adverse selection occurs when the class of risks or set of classes that purchases insurance differs adversely from that anticipated by the firm for example if a firm offers a contract to low risk types at their actuarially fair rate then high risk types will also purchase it with the result that the firm will earn expected losses hence the problem of adverse selection restricts the ability of firms to offer efficient insurance contracts to low risk types it has been demonstrated by rothschild and stiglitz 1976 that provided the proportion of high risk types in the population is above some critical level a this paper is a revised version of chapter 3 of the author s phd thesis entitled the economics of risk classification in insurance london school of economics and political science 1982 i am indebted to my supervisor lucien foldes and an anonymous referee for useful comments the author alone is responsible for any errors herein canadian journal of economics revue canadienne d economique xvil no 3 august aotlt 1984 printed in canada imprimd au canada 0008 4085 84 557 568 1 50 c canadian economics association this content downloaded from 157 55 39 215 on wed 31 aug 2016 04 39 57 utc all use subject to http about jstor org terms

optimal redistributive capital taxation in a neoclassical growth model abstract this paper provides a counterexample to the simplest version of the redistribution models considered by judd 1985 in which the government chooses an optimal distortionary tax on capitalists to finance a lump sum payment to workers i show that the steady state optimal tax on capital income is generally non zero when the capitalists utility is logarithmic and the government faces a balanced budget constraint with log utility agents optimal decisions depend solely on the current rate of return not any future rates of return or tax rates this feature of the economy effectively deprives the government of a useful policy instrument because promises about future tax rates can no longer influence current allocations when combined with a lack of other suitable policy instruments such as government bonds the result is an inability to decentralize the allocations that are consistent with a zero limiting capital tax i show that the standard approach to solving the dynamic optimal tax problem yields the wrong answer in this knife edge case because it fails to properly enforce the constraints associated with the competitive equilibrium specifically the standard approach lets in an additional policy instrument through the back door

dynamic laffer curves abstract in an endogenous growth model with human capital accumulation we discuss the possibility of welfare improving changes on the fiscal policy stance in some actual economies first we characterize the extent to which the initial fall in revenues produced by a permanent tax cut can be compensated by an increase in the tax base due to a dynamic laffer curve effect showing that there is in fact a non trivial margin for substituting debt for taxes on labor and capital income second we show that the largest feasible reduction in labor income tax rates may easily produce a higher welfare gain than the largest feasible reduction in capital income tax rates two qualifications a feasible tax cuts exist only for a relatively high elasticity of intertemporal substitution of consumption and b the preference for the largest feasible tax cut on labor income rather than that on capital income reverses for a low appreciation for leisure relative to consumption in the preferences of the representative agent