on cost benefit rules for green taxes this paper concerns the welfare effects of a green tax reform in a dynamic general equilibrium model with preexisting taxes on labor income and capital income in comparison with previous studies on green taxes in dynamic models which have focused their main attention on long run effects of such reforms i derive cost benefit rules for a change in the tax mix by using the properties of the value function in optimal control theory this enables me to relate the welfare effect of a change in the tax mix to responses in employment the capital stock flow emissions and the stock of pollution along the whole general equilibrium path another contribution of the paper is to examine under what conditions an emission tax which is set permanently below the marginal damage of pollution is welfare superior to an emission tax path that fully internalizes the external effect

dividend taxes corporate investment and q abstract taxes on corporate distributions have traditionally been regarded as a double tax on corporate income this view implies that while the total effective tax rate on corporate source income affects real economic decisions the distribution of this tax burden between the shareholders and the corporation is irrelevant recent research has suggested an alternative to this traditional view one explanation of why firms in the united states pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions this capitalization leaves investors indifferent at the margin between a corporation s decision to pay out dividends or to retain earnings this alternative view holds that while changes in the dividend tax rate will affect shareholder wealth they will have no impact on corporate investment decisions this paper develops econometric tests which distinguish between these two views of dividend taxation by extending tobin s q theory of investment to incorporate taxes at both the corporate and personal levels the implications of each view for corporate investment decisions can be derived the competing views may be tested by comparing the performance of investment equations estimated under each theory s predictions british time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions the econometric results suggest that dividend taxes have important effects on investment decisions

optimal taxation and finite horizon abstract within the blanchard blanchard o 1985 debt deficits and finite horizons journal of political economy 93 2 223 247 model we determine optimal capital and labor income taxation we discuss the conditions for non zero capital income taxation in the long term we make explicit the conditions for time consistent capital income taxation we clarify the role of finite horizon regarding second best optimal taxation

environmental tax policy and intergenerational distribution abstract we study the effects of environmental taxation within the context of an overlapping generations model the quality of the environment is modelled as a durable consumption good introduction of the environmental tax harms old existing generations and benefits young existing generations as well as all future generations increasing the tax in a pareto improving manner is easier the higher the pre existing tax the reverse holds if tax policy is decided by majority rule a suitably designed bond policy can be used to redistribute the efficiency gains due to the internalisation of environmental externalities across the generations

optimal taxes without commitment abstract in the problem of optimal taxation in an economy with labor and capital the optimal solution when the government can commit to a sequence of tax rates entails that the tax on capital tends to zero in the limit with all the tax burden on labor it is well known however that this solution is time inconsistent so if the commitment power is not perfect this second best tax plan will not be sustainable we model explicitly the trade off between the cost of revising the tax plan and the benefit of the revision as a result when commitment is not possible both the limit tax rate and the steady state capital are different from their levels in the second best solution limit taxes on capital may be strictly positive but it may also be the case that the only sustainable plan has subsidies to capital the subsidies induce an overaccumulation of capital which becomes a commitment device against revisions of the tax plan journal of economic literature classification numbers h21 c73

the optimum quantity of debt abstract we find that the welfare gains to being at the optimum quantity of debt rather than the current us level are small and therefore concerns regarding the high level of debt in the us economy may be misplaced this finding is based on a model of a large number of infinitely lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints this model incorporates a different role for government debt than is found in standard models and it captures different cost benefit trade offs on the benefit side government debt enhances the liquidity of households by providing an additional means of smoothing consumption and by effectively loosening borrowing constraints on the cost side the implied taxes have adverse wealth distribution and incentive effects in addition government debt crowds out capital via higher interest rates and lowers per capita consumption

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

optimal taxation and intergovernmental transfer in a dynamic model with multiple levels of government abstract in this paper we study the optimal choices of the federal income tax federal transfers and local taxes in a dynamic model of capital accumulation and with explicit game structures among multiple private agents multiple local governments and the federal government in general the optimal local property tax is zero if the local property tax is constrained to be nonnegative whereas the optimal local consumption tax is always positive when the local consumption tax is chosen optimally the federal income tax can be either positive or negative for most reasonable parameter values our numerical calculations have shown that with a positive local consumption tax there exists a reverse transfer from local governments to the federal government

the recent slowdown of productivity growth the slowdown of productivity growth in the developed countries during the seventies will in this paper be viewed as a combined effect of three closely interacting forces i a long term deterioration in the efficiency and flexibility of some basic mechanisms of the economic and political systems of these countries ii the fading away of a number of uniquely favourable circumstances for productivity growth during the fifties and sixties and iii the exposure of these economies to unusually severe macroeconomic disturbances in the seventies careful inspection of time series with attempted modifications for cyclical factors suggests that there was hardly any general slowdown of productivity growth among developed countries before approximately i972 4 1 as we know the situation is radically different since then labour productivity growth per year for the entire national economy gdp per man hour seems to have fallen between the periods i960 73 and i973 9 by about i 2 percentage points in the united states 45 by about 24 percentage points in western europe2 45 and by about 5 9 percentage points in japan 6o table i see also fig i the slowdown was of about the same size in the business and manufacturing sectors see table i to calculate the extent of the slowdown of total factor productivity growth is of course a much more hazardous matter to which i will return later if just the various system changes and the fading away of the uniquely favourable factors had been the dominating forces behind the productivity growth slowdown we would expect the slowdown to have been gradual rather than abrupt as it turned out to be this abruptness as well as its timing makes the dramatic macroeconomic disturbances around i972 4 a prime suspect when looking for the villain behind the productivity growth slowdown indeed it is a basic hypothesis of the paper that these macroeconomic disturbances were not only by themselves strongly unfavourable for productivity growth but that they also revealed and accentuated the gradual deterioration of the

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

search money and prices it is well known that models in which money is used as a medium of exchange to lubricate trading frictions display multiplicity of equilibria i show that the amount of activity varies as the value of money differs across these equilibria when production opportunities involve random fixed costs when money has high value trade is more profitable therefore there will be more agents engaged in trade relative to equilibria in which money has lower value the higher activity equilibria display higher production not only because more is produced and exchanged per transaction but also because more transactions occur per period this diamond style result is obtained without increasing returns in the matching technology

on a simple rule for the optimal inflation rate in second best taxation abstract the optimal inflation rate is analyzed in the framework of dynamic second best with endogenous factor prices it is shown that when the marginal excess burden of taxation is relatively small the optimal inflation rate is approximated by a simple rule the paper also analyzes the robustness of this rule to the specification of the model money as an input in utility or production

the welfare economics of cooperative and noncooperative fiscal policy abstract in the absence of ricardian equivalence lump sum transfers between households within a country can alter the pattern of national saving and consumption allowing the government to exploit the country s size in world trade and in international borrowing and lending redistribution across generations through unfunded social security retirement schemes or public sector deficit finance with lump sum taxes and transfers enables a national planner to affect both the static and intertemporal terms of trade when trade restrictions or discriminatory taxation of asset income are unavailable due to international agreements the case for cooperative fiscal policy formation by governments of interdependent economies is examined in an overlapping generations economy with internationally perfectly mobile capital and a single relative price the world interest rate the optimum unfunded social security scheme when no distortionary tax instruments are allowed is derived for a government with nationalistic social preferences this policy targets both intergenerational distribution objectives and interest rate objectives the absence of distortionary taxes implies that no overall loss in world surplus need result from the strategic use of lump sum transfers so that coordination of intergenerational transfers is unnecessary for pareto optimality when internationally enjoyed public goods are introduced allocational efficiency requires cooperative selection of national exhaustive public spending programs but it does not demand that the financing of public expenditures be coordinated

time consistent control in non linear models abstract the paper shows how to use optimal control to compute optimal time consistent markovian government policies in nonlinear dynamic general equilibrium models it extends cohen and michel s 1988 results for the linear quadratic case the method involves replacing private agents costate variables with flexible functions of current state variables in the government s maximization problem the functions hold in equilibrium to an arbitrarily close approximation they can be found numerically by perturbation or projection methods a stochastic model of optimal public spending illustrates the technique

heterogeneity and lotteries in monetary search models we introduce ex ante heterogeneity into the berentsen molico and wright monetary search model with lotteries we show that their three main results regarding lotteries do not survive this modification of the environment

alternative forms of government expenditure financing a comparative welfare analysis this paper derives criteria for evaluating the impact of an increase in government expenditure on both the time path of instantaneous utility and overall welfare under alternative forms of tax financing these consist of three factors the first is the direct crowding out effect which reflects the utility differential between the government expenditure being undertaken and the private consumption it is displacing the second describes the intertemporal trade off between the effect on the short run rate of capital accumulation and the resulting change in the the long run capital stock the final term is due to the distortion arising from the pre existence of a tax on wage income copyright 1992 by the london school of economics and political science

social accounting and the public sector this article contributes to the theory of social accounting as such it tries to extend earlier literature on the welfare equivalence of the comprehensive net national product in two main directions both of which refer to the public sector one is by considering welfare measurement problems associated with public good provision and redistributive policy respectively when the public revenues are raised by distortionary taxes the other is by addressing the consequences of a federation like decision structure where independent tax and expenditure decisions are made both by the central government and by lower level governments

prosperity without conflict abstract social conflict and slow growth are features of many developing economies this paper considers the role institutions of property rights and conflict management can play in both achieving prosperity and mitigating conflict in these economies we study how introducing conflict over economic distribution into an otherwise standard model of growth can shape optimal second best taxation policy when diversionary activities cannot be taxed in this context we find that the maximization of economic efficiency may call for a reduction in growth in order to mitigate the problem of diversion even though the economy s growth is inefficiently slow in the absence of taxation this is so when institutional quality is sufficiently poor but not otherwise the paper warns against the conventional justification of growth promoting policies on efficiency grounds independently of institutions

on the optimal taxation of capital income abstract we show that in models in which labor services are supplied jointly with human capital the chamley and judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale moreover for a class of widely used preferences consumption taxes are zero in the limit as well however we show by the construction of two examples that these results no longer hold for certains types of restrictions on tax rates or if there are profits generated journal of economic literatureclassification numbers e62 h21

on market activity and the value of money in a random matching monetary economy efficient and inefficient sellers choose between home or market production since inefficient sellers bargain up their prices two equilibria may existnwith high or low market participationn depending on extent of heterogeneity and frictions in equilibrium the presence of inefficient sellers in the market has two opposing effects it raises trading frequencies so it lowers consumption risk but it lowers the value of money raising prices this may reduce trading efficiency equilibria with full and limited participation can coexist when average efficiency is high and agents are patient limited participation is socially preferable

second best optimal taxation of capital and labor in a developing economy abstract as commercial integration reduces the reliance on foreign trade taxation raising tax revenue has become a major concern for the governments of developing economies this paper examines how the tax burden in a developing economy should be distributed between capital income and labor income we study a two sector model where the traditional sector is informal and consequently cannot be taxed by the government in this setup we find that the optimal second best tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income and possibly more

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

welfare measurement green accounting and distortionary taxes this paper concerns welfare measurement in the presence of distortionary taxes one purpose is to explain why the traditional green nnp measure fails as a welfare indicator when distortionary taxes are present another is to derive a green nnp analogue in a second best environment in the second best optimum the efficiency cost of taxation will affect both the form of the national welfare measure and the proper principles of accounting for pollution

on time inconsistency a technical issue in stackelberg differential games abstract stackelberg differential games are useful settings in which optimal government policies can be studied this paper argues that the analysis of these games involves a key technical issue in particular we question the necessity for optimality of one boundary condition invoked in existing literature the issue is of key interest because the boundary condition is largely responsible for the time inconsistency results previously obtained we show that the boundary condition is not necessary in some cases as a result our finding undermines the credibility of the existing conclusions journal of economic literature classification numbers c61 e62 h21

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

the stock market and the productivity slowdown international evidence extending baily s model of the productivity slowdown to the manufacturing sectors of five other countries we find that a decline in the growth of capital services reflected in declines in the stock market can explain much of the 1973 1978 decline in productivity abroad as well as in the united states we also show however that the stock market declines often preceded the declines in productivity growth and the model is less successful when the sample period is extended through 1981

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

theory of tax smoothing in the small open economy abstract we derive necessary and sufficient conditions for the martingale like behavior of tax rates the world real interest rate is exogenous to the small domestic economy consumers are risk averse and markets are incomplete the government s loss function is not ad hoc

from regressive pollution taxes to progressive environmental tax reforms european countries have increased their use of environmental tax instruments by designing new tax bases but many countries face opposition from public opinion for fear of the distributive consequences of these environmental tax reforms this paper sheds light on the distributive consequences of environmental tax policies when households are heterogeneous the objective is to assess whether an environmental tax reform could be pareto improving when the revenue of the pollution tax is recycled by a change in labor tax properties we show that whatever the degree of regressivity of the environmental tax alone it is possible to design a recycling mechanism that renders the tax reform more pareto efficient by simultaneously decreasing the wage tax and increasing its progressivity

genuine saving and the social cost of taxation following the 1987 report by the world commission on environment and development the genuine saving has come to play a key role in the context of sustainable development and the world bank regula

indivisibilities lotteries and monetary exchange we introduce lotteries randomized trading into search theoretic models of money in a model with indivisible goods and fiat money we show goods trade with probability 1 and money trades with probability where 1 iff buyers have sufficient bargaining power with divisible goods a nonrandom quantity q trades with probability 1 and again money trades with probability where 1 iff buyers have sufficient bargaining power moreover q never exceeds the efficient quantity not true without lotteries we consider several extensions designed to get commodities as well as money to trade with probability less than 1 and to illuminate the efficiency role of lotteries