de gustibus non est taxandum heterogeneity in preferences and optimal redistribution abstract the prominent but unproven intuition that preference heterogeneity reduces redistribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises in terms of first order stochastic dominance with income given familiar functional form assumptions on utility and the distributions of ability and preferences a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy

environmental taxation inequality and engel s law the double dividend of redistribution empirical evidence shows that low income households spend a high share of their income on pollution intensive goods this fuels the concern that an environmental tax reform could be regressive we employ a framework which accounts for the distributional effect of environmental taxes and the recycling of the revenues on both households and firms to quantify changes in the optimal tax structure and the equity impacts of an environmental tax reform we characterize when an optimal environmental tax reform does not increase inequality even if the tax system before the reform is optimal from a non environmental point of view if the tax system before the reform is calibrated to stylized data and is thus non optimal we find that there is a large scope for inequality reduction even if the government is restricted in its recycling options

pigou meets mirrlees on the irrelevance of tax distortions for the second best pigouvian tax this paper extends the mirrlees 1971 model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities using general utility structures and exploring both linear and non linear taxes it is demonstrated that the optimal second best tax on an externality generating good should not be corrected for the marginal cost of public funds since it equals one in the optimal tax system in the optimum distortions of income taxes are equal to marginal redistributional gains if the government does not have access to a non distortionary marginal source of finance the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution the optimal second best corrective tax is then either higher or lower than the pigouvian level the findings in this paper generalize and amend prior results based on representative agent models shedding new light on the weak double dividend hypothesis and on the welfare gains of recycling revenue from environmental taxes

optimality of workfare with heterogeneous preferences with the standard non linear income taxation framework with heterogeneity of preferences in this paper the optimality of workfare as a screening tool is examined it is assumed that workfare does not serve as a human capital investment participation is mandatory and administrative costs are negligible imposing alternative cardinalizations on individuals utilities allows for the possibility that the government optimally redistributes income to or from high disutility of labour individuals under either case it is never optimal to impose workfare on these individuals it is also shown that non productive workfare can be an e cient policy tool in contrast to the results found in besley and coate 1995 brett 1998 and beaudry and blackorby 1997 jel classification h21 h23 optimalite du workfare en presence de preferences heterogenes l auteur examine l timalite du workfare en tant qu instrument de tamisage a l aide du cadre conceptuel traditionnel d imposition non lineaire des revenus en presence de preferences heterogenes on postule que le workfare n est pas un processus d investissement en capital humain que la participatioun est obligatoire et que les couts d administration sont negligeables quand on postule aussi des utilites cardinales differentes pour les individus il devient possible pour le gouvernement de redistribuer optimalement les revenus en faveur ou au detriment des individus pour qui le travail a une tres grande desutilite dans l un et l autre cas on montre que le workfare n est jamais une politique optimale on montre aussi que le workfare dans des activites non productives peut etre un instrument de politique publique e cient contrairement a ce qu a rment besley et coate 1995 brett 1998 et beaudry et blackorby 1997

tricks with hicks the easi demand system we invent implicit marshallian demands which combine desirable features of hicksian and marshallian demands we propose and estimate the exact affine stone index easi implicit marshallian demand system like the almost ideal demand aid system easi budget shares are linear in parameters given real expenditures however unlike the aid easi demands can have any rank and its engel curves can have any shape over real expenditures easi error terms equal random utility parameters to account for unobserved preference heterogeneity easi demand functions can be estimated using gmm or three stage least squares and like aid an approximate easi model can be estimated by linear regression

household energy prices and inequality evidence from german microdata based on the easi demand system abstract this paper studies the distributional effects of rising energy costs for households in contrast to most of the previous literature our specification differentiates between electricity and heating demand and still models other consumption goods in realistic detail we use a yet unexplored data set on household expenditures in germany and extend the recently developed easi demand system for the analysis of inequality and welfare at the individual and social level the easi system reveals non linearity of engel curves which when neglected can lead to biased estimates of distributional effects we find that increases in heating prices are more regressive than those in electricity furthermore current proposals for social tariffs are found to be less effective than targeted compensation schemes

second best taxation of emissions and polluting goods abstract this paper studies the problem of the design of an integrated system of second best emission and output taxes in a model where production costs are negatively correlated with their emissions it shows that i the first best pigouvian rule of equating the marginal private benefit of emissions in production to the marginal social damage of emissions must be modified in the second best ii implementation of the modified pigouvian rule requires all firms to face the same marginal emission tax equal to the marginal social damage of emissions plus an adjustment term reflecting optimal tax objectives iii it may not be necessary to directly tax the polluting goods the latter taxes can be subsumed in the emission tax function iv output taxes must be set solely on the basis of optimal tax objectives no pigouvian adjustment is required v if emission taxes are restricted to be proportional and commodity taxes are constrained the modified pigouvian rule will no longer be optimal vi if preferences are weakly separable in emissions and other goods the pigouvian rule remains valid the marginal emission tax is pigouvian and emission and commodity tax instruments can be set separately to address different objectives a proportional emission tax corrects for externalities while commodity taxes are determined solely on the basis of optimal tax considerations

using elasticities to derive optimal income tax rates this paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates a simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution in the general non linear income tax problem this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of mirrlees the optimal non linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution these formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters

marginal tax reform externalities and income distribution the paper examines welfare improving and revenue neutral directions marginal policy reforms for an economy with nonidentical individuals and an externality that has a feedback effect on the consumption of taxed goods it considers three types of policy instruments the indirect taxes the uniform poll transfer and public abatement this extends the framework set up by ahmad and stern 1984 bovenberg and de mooij 1994 and schob 1996 the theoretical model is illustrated for a specific externality namely congestion caused by peak car transport

environmental policy public finance and the labour market in a second best world abstract environmental and tax policies and the optimal provision of clean and dirty public goods are analysed within the context of a second best framework of optimal taxation households consume both clean and dirty commodities degradation of the natural environment occurs due to the consumption of dirty private and public goods but can be offset when the government engages in abatement activities increased environmental concern implies a higher dirt tax a lower tax on labour less employment more public abatement and a cleaner environment if the elasticity of substitution between private consumption commodities and leisure is large and that between clean and dirty goods is small public consumption may expand while private consumption contracts otherwise public consumption falls

how robust is the uniform emissions pricing rule to social equity concerns abstract this paper examines pollution tax differentiation across industries in light of social equity concerns using theoretical and numerical general equilibrium analyses in an optimal tax framework we characterize the drivers for non uniform optimal taxes stemming from the interaction of household heterogeneity with social preferences quantitatively assessing the case of price based co2 emissions control in the u s economy we find that uniform emissions pricing is approximately optimal when social concerns are defined over inequity induced by the environmental tax the deviation from uniform emissions pricing however becomes non negligible when pollution tax rebates deviate much from optimal transfer schemes or when social concerns are defined over both policy induced impacts and inequity unrelated to environmental policy our results are robust to a number of model extensions including the stringency of the environmental target downstream vs upstream taxation pre existing distortionary taxes and parametric uncertainty in firms and households equilibrium tax responses

second best pigouvian taxation a clarification this paper argues that the search for a purely environmental component of a tax on goods or factors of production that impact the environment separate from its redistributive and distortive effects is fraught with difficulties the quest is often impossible because of the interconnectedness between labor supply consumption decisions and the environmental quality the paper differentiates between two conceptualization for the pigouvian tax that have been employed in the literature and argues that each has tried to isolate the environmental component in its own way one conceptualization due to cremer et al j public econ 70 343 364 1998 does so by ruling out direct feedback from changes in environmental quality on the incentive effect of the tax in the second conceptualization due to bovenberg and ploeg s j public econ 55 349 390 1994 incentive effects are ruled out by making consumers valuation of environmental quality independent of the labor supply this is achieved by assuming separability between labor supply and other goods including environmental equality to convey its message the paper studies the properties of optimal polluting and non polluting non labor input taxes in a mirrleesian model with endogenously determined wages

the taxation of superstars how are optimal taxes affected by the presence of superstar phenomena at the top of the earnings distribution to answer this question we extend the mirrlees model to incorporate an assignment problem in the labor market that generates superstar effects perhaps surprisingly rather than providing a rationale for higher taxes we show that superstar effects provide a force for lower marginal taxes conditional on the observed distribution of earnings superstar effects make the earnings schedule convex which increases the responsiveness of individual earnings to tax changes we show that various common elasticity measures are not sufficient statistics and must be adjusted upwards in optimal tax formulas finally we study a comparative static that does not keep the observed earnings distribution fixed when superstar technologies are introduced inequality increases but we obtain a neutrality result finding tax rates at the top unaltered

intertemporal solvency and indexed debt evidence from brazil 1976 1991 abstract this paper examines domestically held government debt financial indexation inflation and intertemporal solvency in brazil an error correction model is used to examine the temporal causality of expenditures taxation and real indexation evidence shows that for the 1986 1991 period reductions in real indexation followed increases in government spending such reductions while generally associated with anti inflation plans served as implicit defaults the policy was largely unrelated to foreign factors of course such a policy cannot be sustained in the long run accordingly brazil recently ended backward looking financial indexation

substitution between clean and dirty energy inputs a macroeconomic perspective in macroeconomic models the elasticity of substitution between clean and dirty energy inputs within the energy aggregate is a central parameter in assessing the necessary conditions for long run green growth using new sectoral data in a panel of 26 countries we formulate specifications of nested constant elasticity of substitution production functions that allow estimating this parameter for the first time we present evidence that it significantly exceeds unity a favorable condition for promoting green growth

frictional wage dispersion in search models a quantitative assessment we propose a new measure of frictional wage dispersion the mean min wage ratio for a large class of search models we show that this measure is independent of the wage offer distribution but depends on statistics of labor market turnover and on preferences under plausible preference parameterizations observed magnitudes for worker flows imply that in the basic search model and in most of its extensions frictional wage dispersion is very small notable exceptions are some of the most recent models of on the job search our new measure allows us to rationalize the diverse empirical findings in the large literature estimating structural search models

redistribution and optimal mixed taxation in the presence of consumption externalities abstract the literature on externalities and optimal redistributive taxation in the presence of asymmetric information has so far been confined to the case where externalities are of the atmospheric type one of the main results from this literature has been that the so called additivity property discovered by sandmo sandmo a 1975 optimal taxation in the presence of externalities swedish journal of economics 77 86 98 holds true also in this more general context this paper extends previous analyses by considering a general model where even if there is only one externality generating good the externality is not constrained to be of the atmospheric type the model is sufficiently unrestrictive to admit a variety of interpretations for example it is possible to interpret it as reflecting the case of different types of agents being differently vulnerable to the same externality another possibility is to view agents of different types as not equally effective as externality generating units yet another interpretation can be in terms of positional goods we show that while the additivity property fails in general to hold conditions can be derived which are sufficient to recover it both with respect to the commodity tax structure and with respect to the shape of the income tax schedule moreover stressing one or the other of the aforementioned interpretations delivers different results for the validity of the additivity property

optimal linear income taxation with general equilibrium effects on wages abstract the paper argues that the endogeneity of wages may make a considerable difference to optimal linear tax rates in this case there is not only the usual direct redistribution via the fiscal system but also the general equilibrium redistribution due to the change in wages depending on the elasticity of substitution of the production function and the labour supply elasticities these may be reinforcing or opposing it is shown that the general equilibrium effect may plausibly outweigh the direct effect so that net redistribution to the lower paid involves a wage subsidy financed by a lump sum tax

estimates from a consumer demand system implications for the incidence of environmental taxes abstract most studies suggest that environmental taxes are regressive making them less attractive policy options we consider the distributional effects of a gasoline tax increase using four incidence measures and under three scenarios for gas tax revenue use to incorporate behavioral responses we use consumer expenditure survey data to estimate a consumer demand system that includes gasoline other goods and leisure our estimates confirm that when revenues are not recycled a gasoline tax is regressive use of incidence measures that ignore demand responses however will substantially overstate this regressivity in contrast the differences between the equivalent variation and easier to implement consumer surplus measures are relatively small in addition our results suggest that using the additional gas tax revenue to fund labor tax cuts makes the policy substantially less regressive while using the revenue to fund lump sum transfers actually makes it progressive

fertilizer market development a comparative analysis of ethiopia kenya and zambia abstract this article synthesizes case studies from kenya zambia and ethiopia to assess how differences in the implementation of fertilizer marketing policies have affected the costs and risks borne by marketing actors the investment response by private traders and fertilizer consumption financial cost accounting techniques indicate that domestic marketing costs account for 50 or more of farm gate prices the sum of importer wholesaler and retailer profit margins generally account for less than 10 there are opportunities to reduce domestic marketing costs through the following reducing port fees coordinating the timing of fertilizer clearance from the port with up country transport reducing transport costs through port rail and road improvements reducing high fuel taxes and reducing the uncertainty associated with government input distribution programs that impose additional marketing costs on traders estimated reductions in the farm gate price of fertilizer from implementing the full range of options identified in each country range from 11 to 18 price reductions of this magnitude if passed along to farmers would increase farmers effective demand for fertilizer investments in selected publically provided goods often considered outside the scope of fertilizer marketing policy per se strongly affect the costs of fertilizer farmers willingness to pay for it and hence the performance of markets

how to make a carbon tax reform progressive the role of subsistence consumption this letter analyzes the distributional effects of a carbon tax reform when households must consume carbon intensive goods above a subsistence level the reform is progressive if revenues are recycled as uniform lump sum transfers in other cases it is regressive

nonlinear tax incidence and optimal taxation in general equilibrium we study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages we derive in closed form the effects of reforming nonlinearly an arbitrary tax system by showing that this problem can be formalized as an integral equation our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous we show qualitatively and quantitatively that contrary to conventional wisdom if the tax system is initially suboptimal and progressive the general equilibrium trickle down forces may raise the benefits of increasing the marginal tax rates on high incomes we finally derive a parsimonious characterization of optimal taxes

public provision commodity demand and hours of work an empirical analysis the theoretical analysis of optimal commodity taxation is advanced but there is only limited empirical evidence to guide commodity tax policies with this paper we contribute to this body of literature by empirically examining using finnish consumption data the relation between working hours consumption demand and the use of publicly provided day care when labour income is controlled for in a non parametric way we find that capital income and housing expenses are negatively associated with working hours whereas the use of childcare is positively correlated with working hours these results provide arguments for taxing capital income and housing and for subsidizing day care

optimal control of externalities in the presence of income taxation a substantial literature examines second best environmental policy focusing particularly on how the pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation additional literature is motivated by the possibility that distributive concerns should amend the internalization prescription it is demonstrated however that simple first best rules unmodified for labor supply distortion or distribution are correct in a natural basic formulation of the problem specifically setting all commodity taxes equal to marginal harms and subsidies equal to marginal benefits can generate a pareto improvement likewise a marginal reform in the direction of the first best can yield a pareto improvement qualifications and explanations for differences from previous work are also presented

optimal marginal and average income taxation under maxi min using the mirrlees optimal income tax model with a maxi min social welfare function we derive conditions for a decreasing marginal tax rate throughout the skill distribution a strictly concave tax function in income and a single peaked average tax schedule with additive preferences and a constant labor supply elasticity marginal tax rates are decreasing below the modal skill level and will also decrease above the mode if aggregate skills are non decreasing with the skill level in this case and with a bounded skill distribution or with a constant hazard rate the tax function is strictly concave in income and the average tax rate single peaked when quasilinear utility functions apply in either consumption or leisure under fairly mild restrictions on the truncated or untruncated distribution function marginal tax rates are decreasing in skill and the average tax profile is single peaked the distribution of skills has the same quantitative influence for either case of quasilinearity these results continue to hold when there is bunching at the bottom due to a binding non negativity constraint we also illustrate how relaxing the assumption of constant elasticity of labor supply generally used in the literature modifies the results

factors influencing the profitability of fertilizer use on maize in zambia major findings the additional maize produced from a given amount of fertilizer applied varied widely across households even after largely controlling for soil and rainfall conditions the median estimated response rate was 15 9kgs of maize per kg nitrogen applied under the range of conditions and smallholder management practices average maizefertilizer response rates declined as the application rate increased beyond 2 bags of urea and 2 bags of d compound factors raising the response rate and profitability of fertilizer use included timely availability application rates less than the moa 4x4 recommendation use of animal draft power in land preparation and use of hybrid seed in remote areas and given current management practices fertilizer use appears to be profitable only for a minority of smallholder farmers in the relatively remote areas for farmers in the more accessible areas profitability of fertilizer use depends on timely availability if fertilizer is not available on time even farmers in the more accessible parts of this area of relatively high agronomic suitability for maize production are largely unable to use fertilizer profitably because over 30 percent of the households reported that fertilizer was delivered late these findings indicate that efforts to ensure timely distribution can contribute substantially to the productivity gains achievable from fertilizer use

war making and state making governmental expenditures tax revenues and global wars addressing the disputed relationship between war and the expansion of governmental expenditures and revenues box tiao intervention models are applied to a number of british 1700 1980 united states 1792 1980 french 1815 1979 and japanese 1878 1980 spending and taxation series distinguishing between global and interstate wars the more intensive and extensive bouts of warfare global wars tend to bring about abrupt permanent impacts in contrast to the temporary changes associated with most interstate wars the observed displacements are reflected in both war related and nonwar related types of expenditure and are also observed before 1900 although our findings are not universally applicable and are subject to various other qualifications they may be interpreted in general as reinforcing the need for an appreciation of the persistent centrality of war especially global war in the discontinuous growth and expansion of the modern state

is the greek budget deficit sustainable after all empirical evidence accounting for regime shifts this article re examines the sustainability of the greek budget deficit by using a formal framework based on the government s intertemporal budget constraint the empirical analysis uses annual data from 1960 to 2011 and employs traditional as well as more recent unit root and cointegration techniques that account for linear and nonlinear effects in fiscal policy actions unlike previous studies the evidence suggests that allowing for structural breaks the greek budget deficit is unsustainable the parameter after the second detected break reflects the structural deficiencies of the greek economy

externalities and optimal taxation this paper reexamines the optimal tax design problem income and commodities in the presence of externalities the nature of the second best and the choice of the tax instruments are motivated by the informational structure in the economy the main results are i environmental levies linear or nonlinear differ in formula from pigouvian taxes by the expressions for the optimal tax on private goods ii externalities do not affect commodity tax formulas linear and nonlinear for private goods iii externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear and iv a general income tax plus strictly pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution at any given consumption bundle

nonlinear pricing with random participation the canonical selection contracting programme takes the agent s participation decision as deterministic and finds the optimal contract typically satisfying this constraint for the worst type upon weakening this assumption of known reservation values by introducing independent randomness into the agents outside options we find that some of the received wisdom from mechanism design and nonlinear pricing is not robust and the richer model which allows for stochastic participation affords a more general empirical specification we develop a multidimensional methodology for addressing this class of problems providing two important applications to nonlinear pricing first with nonlinear pricing by a monopolist the familiar nodistortion at the top result persists but in tandem with the surprising conclusion that there is either no distortion at the bottom or bunching second in a simple model of product differentiated duopolists competing with nonlinear pricing we show that generally the duopoly outcome is qualitatively similar to the monopoly outcome however when marginal costs are symmetric and competition is sufficiently intense distortions disappear and the equilibrium outcome takes a remarkably simple form efficient quality allocations with cost plus fee pricing

soil quality and fertilizer use rates among smallholder farmers in western kenya studies of fertilizer use in sub saharan africa have been dominated by analyses of economic and market factors having to do with infrastructure institutions and incentives that prevent or foster increased fertilizer demand largely ignoring how soil fertility status conditions farmer demand for fertilizer we apply a switching regression model to data from 260 farm households in western kenya in order to allow for the possibility of discontinuities in fertilizer demand based on a soil carbon content scc threshold we find that the usual factors reflecting liquidity and quasi fixed inputs are important on high scc plots but not on those with poorer soils external inputs become less effective on soils with low scc hence the discernible shift in behaviors across soil quality regimes for many farmers improved fertilizer market conditions alone may be insufficient to stimulate increased fertilizer use without complementary improvements in the biophysical conditions that affect conditional factor demand

market concentration and pricing behavior in the fertilizer industry a global approach the global fertilizer industry is a market with high and increasing levels of concentration and trade low income regions such as sub saharan africa are highly dependent on imported fertilizer and the landed price of imports at the port of entry usually represents a large fraction of the fertilizer supply costs in these regions this article formally examines the relationship between market concentration and prices from a global perspective we follow a dynamic panel approach using annual data on urea for a panel of countries and observe that prices are generally higher in more concentrated markets using different measures of concentration and model specifications based on additional simulations we find that a 10 increase in competition could increase fertilizer use by 13 19 and rural incomes by 1 2 in regions like sub saharan africa overall the results highlight the need to further examine the pricing behavior and potential market power exertion of major global producers which can help to better understand the industry supply chain in developing countries and provide additional insights into the design of policies including input subsidy programs intended to promote long term fertilizer adoption

the elasticity of taxable income with respect to marginal tax rates a critical review this paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data first we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis we discuss what other parameters should be estimated when the elasticity is not a sufficient statistic second we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the united states to illustrate those issues third we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out finally we discuss avenues for future research jel h24 h31 j22

structural change and the kaldor facts in a growth model with relative price effects and non gorman preferences u s data reveal three facts 1 the share of goods in total expenditure declines at a constant rate over time 2 the price of goods relative to services declines at a constant rate over time and 3 poor households spend a larger fraction of their budget on goods than do rich households i provide a macroeconomic model with non gorman preferences that rationalizes these facts along with the aggregate kaldor facts the model is parsimonious and admits an analytical solution its functional form allows a decomposition of u s structural change into an income and substitution effect estimates from micro data show each of these effects to be of roughly equal importance

distributional impacts of carbon pricing a general equilibrium approach with micro data for households article i nfo many policies to limit greenhouse gas emissions have at their core efforts to put a price on carbon emissions carbon pricing impacts households both by raising the cost of carbon intensive products and by changing factor prices a complete analysis requires taking both effects into account the impact of carbon pricing is determined by heterogeneity in household spending patterns across income groups as well as heterogeneity in factor income patterns across income groups it is also affected by precise formulation of the policy how is the revenue from carbon pricing distributed as well as the treatment of other government policies e g the treatment of transfer payments what is often neglected in analyses of policy is the heterogeneity of impacts across households even within income or regional groups in this paper we incorporate 15 588 households from the u s consumer and expenditure survey data as individual agents in a comparative static general equilibrium framework these households are represented within the mit usrep model a detailed general equilibrium model of the u s economy in particular we categorize households by full household income factor income as well as transfer income and apply various measures of lifetime income to distinguish households that are temporarily low income e g retired households drawing down their financial assets from permanently low income households we also provide detailed within group distributional measures of burden impacts from various policy scenarios

unwilling or unable to cheat evidence from a tax audit experiment in denmark this paper analyzes a tax enforcement field experiment in denmark in the base year a stratified and representative sample of over 40 000 individual income tax filers was selected for the experiment half of the tax filers were randomly selected to be thoroughly audited while the rest were deliberately not audited the following year threat of audit letters were randomly assigned and sent to tax filers in both groups we present three main empirical findings first using baseline audit data we find that the tax evasion rate is close to zero for income subject to third party reporting but substantial for self reported income since most income is subject to third party reporting the overall evasion rate is modest second using quasi experimental variation created by large kinks in the income tax schedule we find that marginal tax rates have a positive impact on tax evasion for self reported income but that this effect is small in comparison to legal avoidance and behavioral responses third using the randomization of enforcement we find that prior audits and threat of audit letters have significant effects on self reported income but no effect on third party reported income all these empirical results can be explained by extending the standard model of rational tax evasion to allow for the key distinction between self reported and third party reported income

the desirability of commodity taxation under non linear income taxation and heterogeneous tastes abstract this paper revisits the atkinson stiglitz result on uselessness of commodity taxation in the presence of optimal non linear income taxation in a more general setup namely when tastes are heterogeneous this general analysis displays the key economic assumptions under which the atkinson stiglitz result is robust a small tax on a given commodity is desirable if high income earners have a relatively higher taste for this commodity or if consumption of this commodity increases with leisure an application to the case of savings suggests that even in the presence of optimal non linear earnings taxation there is a role for a supplemental capital income tax in the standard overlapping generation model

a simpler theory of optimal capital taxation abstract this paper develops a theory of optimal capital taxation that expresses optimal tax formulas in sufficient statistics we first consider a simple model with utility functions linear in consumption and featuring heterogeneous utility for wealth in this case there are no transitional dynamics the steady state is reached immediately and has finite elasticities of capital with respect to the net of tax rate this allows for a tractable optimal tax analysis with formulas expressed in terms of empirical elasticities and social preferences that can address many important policy questions these formulas can easily be taken to the data to simulate optimal taxes which we do using u s tax return data on labor and capital incomes second we show how these results can be extended to the case with concave utility for consumption the same types of formulas carry over by appropriately defining elasticities we show that one can recover all the results from the simpler model using a new and non standard steady state approach that respects individual preferences even with a fully general utility function

financing education using optimal redistributive taxation abstract in this article the joint use of an income tax and public provision of education as instruments to achieve the government s distributional objectives is considered individuals differ in innate labour productivity and in aptitude to acquire skills through education actual labour productivity depends on both innate skill and the amount of education received using a generalized version of the mirrlees tax problem that incorporates these features qualitative properties of an optimal tax schedule are investigated

on international equity weights and national decision making on climate change abstract estimates of the marginal damage costs of carbon dioxide emissions require the aggregation of monetised impacts of climate change over people with different incomes and in different jurisdictions implicitly or explicitly such estimates assume a social welfare function and hence a particular attitude towards equity and justice we show that previous approaches to equity weighting are inappropriate from a national decision maker s point of view because domestic impacts are not valued at domestic values we propose four alternatives sovereignty altruism good neighbour and compensation with different views on concern for and liability towards foreigners the four alternatives imply radically different estimates of the social cost of carbon and hence the optimal intensity of climate policy

testing for the government s intertemporal budget restriction in brazil during 1823 1889 this article tests whether the government s intertemporal budget restriction was fulfilled during the brazilian imperial period 1823 1889 to accomplish this newly developed tests for cointegration with unknown structural breaks are applied it is found that government spending and government revenue are cointegrated if the effect of two unknown structural breaks is taken into account the estimated parameter vector reveals that the one by one relationship that is required for solvency does not prevail for the sub periods before and after the first break however it prevails for the sub period after the second break we interpret these findings as empirical support for the long run government solvency in brazil at the end of the imperial period

a reexamination of the optimal nonlinear income tax abstract this paper investigates mirrlees model of optimal income taxation it provides a concrete example of utility and density functions for which the solution to the usual first order model is not implementable i e and example where the first order approach does not work adding second order conditions leads to an extended model and to implementable solutions if these conditions are binding one gets a kink in the optimal net income schedule and bunching of individuals occurs the properties of an optimal nonlinear income tax are reexamined within the extended model

optimal income transfer programs intensive versus extensive labor supply responses this paper analyzes optimal income transfers for low incomes labor supply responses are modeled along the intensive margin intensity of work on the job and along the extensive margin participation into the labor force when behavioral responses are concentrated along the intensive margin the optimal transfer program is a classical negative income tax program with a substantial guaranteed income support and a large phasing out tax rate however when behavioral responses are concentrated along the extensive margin the optimal transfer program is similar to the earned income tax credit with negative marginal tax rates at low income levels and a small guaranteed income carefully calibrated numerical simulations are provided

environmental taxes with heterogeneous consumers an application to energy consumption in france abstract this paper constructs a model with four groups of households who have preferences over labor supply consumption of polluting energy related and non polluting non energy goods and emissions it quantifies the model for the french economy and computes its optimal tax equilibria under nine second best tax regimes we find that the redistributive role of environmental taxes requires the polluting goods to be taxed at a rate much below their marginal social damage these goods may even require an outright subsidy if the society values equality a lot secondly if environmental taxes that have an exclusively externality correcting role they benefit all types although the gains are rather modest the gains and losses become more substantial when environmental taxes have a redistributive role as well third setting the environmental tax at its pigouvian level rather than its optimal externality correcting cum redistributive level benefits the high income group at the expense of the low income groups fourth nonlinear taxation of polluting goods and nonlinear commodity taxation in general is a powerful redistributive mechanism fifth introducing environmental taxes in the current french tax system with its suboptimal income taxes results in substantial welfare gains for the highest income group and a sizable loss for the least well off persons

top incomes in the long run of history a recent literature has constructed top income shares time series over the long run for more than twenty countries using income tax statistics top incomes represent a small share of the population but a very significant share of total income and total taxes paid hence aggregate economic growth per capita and gini inequality indexes are sensitive to excluding or including top incomes we discuss the estimation methods and issues that arise when constructing top income share series including income definition and comparability over time and across countries tax avoidance and tax evasion we provide a summary of the key empirical findings most countries experience a dramatic drop in top income shares in the first part of the twentieth century in general due to shocks to top capital incomes during the wars and depression shocks top income shares do not recover in the immediate postwar decades however over the last thirty years top income shares have increased substantially in english speaking countries and in india and china but not in continental european countries or japan this increase is due in part to an unprecedented surge in top wage incomes as a result wage income comprises a larger fraction of top incomes than in the past finally we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open

the effects of male and female labor supply on commodity demands we examine the effects of male and female labor supply on household demands and present a simple and robust test for the separability of commodity demands from labor supply using data on individual households from six years of the uk fes we estimate a demand system for seven goods which includes hours and participation dummies as conditioning variables allowance is made for the possible endogeneity of these conditioning labor supply variables we find that separability is rejected furthermore we present evidence that ignoring the effects of labor supply leads to bias in the parameter estimates

redistributive taxation in the roy model we consider optimal redistribution in a model where individuals can self select into one of several possible sectors based on heterogeneity in a multidimensional skill vector we show that when the government does not observe the sectoral choice or underlying skills of its citizens the constrained pareto frontier can be implemented with a single non linear income tax we derive formulas for this optimal tax schedule if sectoral inputs are complements a many sector model with self selection leads to optimal income taxes that are less progressive than the corresponding taxes in a standard single sector model under natural conditions however they are more progressive than in a multi sector model without occupational choice or without overlapping wage distributions as in stiglitz 1982

optimal control of externalities in the presence of income taxation optimal control of externalities a substantial literature examines second best environmental policy focusing particularly on how the pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation additional literature is motivated by the possibility that distributive concerns should amend the internalization prescription it is demonstrated however that simple first best rules unmodified for labor supply distortion or distribution are correct in a natural basic formulation of the problem specifically setting all commodity taxes equal to marginal harms and subsidies equal to marginal benefits can generate a pareto improvement likewise a marginal reform in the direction of the first best can yield a pareto improvement for other reforms a simple efficiency test characterizing when a pareto improvement is possible is offered qualifications and explanations for the substantial departure from results in previous work are also elaborated

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

how high are rates of return to fertilizer evidence from field experiments in kenya the idea that peasant farmers are rational profit maximizers has been a staple of development economics since theodore schultz 1964 it has also been influential in shaping policy for example agricultural experts have stressed the importance of fertilizer use in raising agricultural yields pointing to impressive results on experimental farms and to huge differences in agricultural productivity across countries with different levels of fertilizer use robert evenson and douglas gollin 2003 historically many countries subsidized fertilizer in response but economists have been skeptical of claims that farmers are leaving money on the table noting that fertilizer may not have the same returns on real world farms as on experimental farms that returns to fertilizer may be low for many farmers even if they are high on average tavneet suri 2007 that fertilizer may require complementary inputs or may be risky many countries have withdrawn or scaled back fertilizer psychology and development theory and experimental evidence

hourly wage rate and taxable labor income responsiveness to changes in marginal tax rates recently a voluminous literature estimating the taxable income elasticity has emerged as an important field in empirical public economics however to a large extent it is still unknown how the hourly wage rate an important component of taxable income reacts to changes in marginal tax rates in this study we use a rich panel data set and a sequence of tax reforms that took place in sweden during the 1980 s to estimate the elasticity of the hourly wage rate with respect to the net of tax rate while carefully accounting for the endogeneity of marginal tax rates as well as other factors that determine wage rates we do find a statistically significant response both among married men and married women the hourly wage rate elasticity with respect to the net of tax rate is estimated to 0 14 0 16 for males and 0 41 0 57 for females in addition we obtain uncompensated taxable labor income elasticities of around 0 21 for men and 0 96 1 44 for women in contrast to earlier studies we also find significant income effects for males accordingly for males the compensated taxable labor income elasticity is about 4 percentage points higher than the uncompensated one

expanding access to agricultural inputs in africa a review of recent market development experience abstract this paper asks what can be done to expand input use in africa and can it be done in a manner that supports continued growth of private sector input markets the precarious food security situation in many african countries has prompted governments and donors to use input distribution or credit programs as a means of rapidly increasing food supply for the poor these efforts however often reduce the ability of input market development programs to stimulate commercial interest in input supply a review of both types of programs describes recent efforts to address constraints to expanded input use and finds that further expansion is often constrained by inadequate investment in a variety of public goods needed to stimulate input led agricultural intensification rather than continuing to invest resources in programs to provide inputs or credit directly to farmers governments with donor assistance should consider shifting their focus to the serious deficiencies in the provision of public goods roads irrigation basic education market information systems research and extension and improved institutions contract law and enforcement systems of grades and standards improvements in these areas can both lower costs of supply and increase farm level demand creating a situation where the private sector will have greater incentives to expand input distribution networks to zones and farmers who currently do not have access

redistribution and pollution taxes with non linear engel curves abstract this paper analyses optimal corrective taxation and optimal income redistribution the pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages moreover under general utility functions optimal pollution taxes should be set below the pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods however if engel curves are linear optimal pollution taxes should follow the first best rule for the pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods the often used quasi linear ces and stone geary utility functions all have linear engel curves if engel curves are linear and if pollution taxes are not optimised pareto improving green tax reforms exist that move the pollution tax closer to the pigouvian tax simulations demonstrate that optimal corrective taxes should be pigouvian if the demand for polluting goods is derived from a les demand system but deviate from the pigouvian taxes if demand for polluting goods demand is derived from a piglog demand system

income inequality and willingness to pay for environmental public goods we study how the distribution of income among members of society and income inequality in particular affects social willingness to pay wtp for environmental public goods we find that social wtp for environmental goods decreases increases with income inequality if and only if environmental goods and manufactured goods are substitutes complements we derive adjustment factors for benefit transfer to control for differences in income distributions between a study site and a policy site for illustration we quantify how social wtp for environmental public goods depends on the respective income distributions for empirical case studies in sweden and the world at large we find that the adjustment for income inequality can be substantial

negative marginal tax rates and heterogeneity the bulk of the theory of optimal taxation recommends that the marginal tax rate be everywhere positive labor supply is distorted downwards compared with laissez faire the conditions under which the result holds continuous labor supply or intensive margin unobserved productivity constant opportunity cost of work utilitarian planner with a redistributive motive towards lower incomes have been thoroughly investigated jesus seade 1977 1982 ivan werning 2000 martin f hellwig 2007 the purpose of the present paper is to describe how negative marginal tax rates can be optimal keeping with the intensive set up largely studied in the literature when there are multiple dimensions of heterogeneity indeed james a mirrlees 1976 in its section iv indicates along a line that will be pursued further here that the sign of the marginal tax rate cannot be predicted when the agents in the economy differ along several dimensions of heterogeneity workers differ in both their productivities and opportunity costs of work under utilitarianism heterogeneity comes into play through its impact on cardinal utilities how social weights or marginal utilities of income vary with income determines the shape of the optimal tax scheme conditionally on income utility and more importantly its derivative with respect to income may either decrease or increase with work opportunity costs this may vary according to circumstances depending on whether the cost is associated with poor living conditions i e a handicap or reflects a taste for leisure or opportunities outside the labor market such as gardening at home or black market activities for a given income the social weight is proportional to the expected marginal utilities where the expectation is taken over the distribution of work opportunity costs at this income level therefore the social weight curve depends on both the specification of the cardinal utility function and on how the distribution of work opportunity costs changes with income the fact that heterogeneity can blur the redistribution motive through the possible correlation between ability and onerousness of work has been discussed in models where agents have a finite number of types a pioneer work is that of joseph e stiglitz 1982 who shows that the high skilled individual should face a negative marginal tax rate if the low skilled individual s upward incentive constraint binds which is the case if social weights are increasing in type the importance of this observation for policy was pointed out in katherine cuff 2000 who is the first to explicitly link social weights to the opportunity cost of work using alternative choices of cardinal utilities in a model with four types combining two values for productivity and two values for the cost of work robin boadway et al 2002 showed how it can be optimal to have binding upward incentive constraints when high opportunity costs are associated with small social weights

tax and spend spend and tax or fiscal synchronization new evidence for ten countries cointegration and vector autoregression are used to test the tax and spend spend and tax and fiscal synchronization for ten countries using annual time series data over the period 1951 to 1996 three of them are part of the newly industrialized countries of asia south korea taiwan and thailand and seven are industrialized countries australia canada japan new zealand south africa uk and the usa this paper includes gdp as a control variable into the model like baghestani and mcnown 1994 ross and payne 1998 and koren and stiassny 1998 the johansen 1988 and johansen and juselius 1990 cointegration test results indicate that these three variables are cointegrated with two cointegrating vectors for south korea one vector for australia canada south africa taiwan uk and the usa and no vector for japan new zealand and thailand the results from granger causality tests suggest unidirectional causality running from revenues to spending supporting the tax and spend hypoth

assessing the mean reversion behaviour of fiscal policy the perspective of asian countries this article investigates fiscal policy sustainability in 10 asian countries by adopting a battery of unit root tests univariate unit root tests reveal that the fiscal stance in these countries follows a nonstationary process while the opposite conclusion was drawn for the same dataset using the commonly employed panel unit root techniques by utilizing the series specific panel unit root test recently developed by breuer et al 2002 suradf seemingly unrelated regression augmented dickey fuller that allows testing for the presence of nonstationarity within individual cross sections of the panel we found that only cross sections four out of 10 countries in the panel are stationary this means that fiscal deficits in most asian countries are in violation of their intertemporal budget constraint and that the deficits are too large

optimal linear commodity taxation under optimal non linear income taxation abstract this paper analyzes optimal linear commodity taxes joint with non linear income taxes we provide optimal tax rules based on empirically observable elasticities earnings and commodity demands we demonstrate that commodities should be taxed subsidized if conditional on earnings doing so boosts labor supply as the critical role of commodity taxation is to alleviate distortions on labor supply caused by income taxation we extend the standard formula for optimal non linear income taxation for the presence of optimal linear commodity taxes we correct parts of the literature by showing that the optimal second best allocations derived by atkinson and stiglitz 1976 1980 cannot be supported by linear commodity taxes

when environmental and redistribution concerns collide the case of electricity pricing abstract countries worldwide face major income inequality and environmental challenges however recent social upheavals reveal the conflict of interests induced by policies designed to address these concerns one example relates to residential electricity where volumetric grid charges and taxes may impede the affordability of electricity we develop and calibrate a model that captures the social planner s trade off between inequality aversion and environmental concerns we employ panel data on 105 000 households in the swiss canton of bern from 2008 to 2013 including electricity consumption household income and tax payment characteristics the results show that with inequity aversion and no negative environmental externalities electricity consumption should be subsidised by income tax revenue with negative environmental externalities or asymmetric information between the government and the utility end user electricity prices are shifted upwards for high degrees of inequality aversion the optimal electricity end user price is below the marginal cost even in the presence of negative environmental externalities

a general formula for the optimal level of social insurance in an influential paper baily 1978 showed that the optimal level of unemployment insurance ui in a stylized static model depends on only three parameters risk aversion the consumption smoothing benefit of ui and the elasticity of unemployment durations with respect to the benefit rate this paper examines the key economic assumptions under which these parameters determine the optimal level of social insurance i show that a baily type expression with an adjustment for precautionary saving motives holds in a general class of dynamic models subject to weak regularity conditions for example the simple reduced form formula derived here applies with arbitrary borrowing constraints durable consumption goods private insurance arrangements and search and leisure benefits of unemployment

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

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

quadratic engel curves and consumer demand this paper presents a model of consumer demand that is consistent with the observed expenditure patterns of individual consumers in a long time series of expenditure surveys and is also able to provide a detailed welfare analysis of shifts in relative prices a nonparametric analysis of consumer expenditure patterns suggests that engel curves require quadratic terms in the logarithm of expenditure while popular models of demand such as the translog or the almost ideal demand systems do allow flexible price responses within a theoretically coherent structure they have expenditure share engel curves that are linear in the logarithm of total expenditure we derive the complete class of integrable quadratic logarithmic expenditure share systems a specification from this class is estimated on a large pooled data set of u k households models that fail to account for engel curvature are found ro generate important distortions in the patterns of welfare losses associated with a tax increase

generalized social marginal welfare weights for optimal tax theory this paper proposes to evaluate tax reforms by aggregating money metric losses and gains of different individuals using generalized social marginal welfare weights optimum tax formulas take the same form as standard welfarist tax formulas by simply substitut ing standard marginal social welfare weights with those generalized weights weights directly capture society s concerns for fairness without being necessarily tied to individual utilities suitable weights can help reconcile discrepancies between the welfarist approach and actual tax practice as well as unify in an operational way the most prominent alternatives to utilitarianism such as libertarianism equality of opportunity or poverty alleviation jel d60 d63 h21 h23 i38

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic