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

capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

market distortions and local indeterminacy a general approach we provide a methodology to study the role of market distortions on the emergence of indeterminacy and bifurcations it consists in introducing general specifications for the elasticities of the crucial functions defining the aggregate equilibrium dynamics of the model this allows us to study how market distortions influence the range of values for the elasticity of input substitution under which local indeterminacy and bifurcations occur highlighting the main channels and classes of distortions responsible for indeterminacy most of the specific market imperfections considered in the related literature are particular cases of our framework comparing them we obtain several equivalence results in terms of local dynamic properties applying this methodology to the woodford 30 framework we find that distortions in the capital market per se do not play a major role we further show that for empirically plausible values of elasticity of substitution between inputs indeterminacy requires a minimal degree of distortions this degree seems to be high under output market distortions while with labor market distortions the required degree is empirically plausible

optimal policy and the risk properties of human capital reconsidered abstract this paper considers how optimal education and tax policy depends on the risk properties of human capital a key feature of human capital investments is whether they increase or decrease wage risk in a benchmark model it is shown that this feature alone determines whether a constrained optimal allocation should be characterized by a positive or a negative education premium in the same model a positive intertemporal wedge is optimal the robustness of these results is explored in two generalizations nonobservability of education and nonobservability of consumption finally policies that implement the constrained efficient allocations are considered

continuous time sunspot equilibria and dynamics in a model of growth abstract this article is concerned with the existence of sunspot equilibria in a continuous time growth setting it brings alternative approaches in the self fulfilling prophecies literature continuous time global dynamics and non stationarity the main contribution of the use of continuous time methods is to allow for a complete understanding of the global dynamical properties of these stochastic equilibria within a non stationary economy in this model fluctuations in growth rates occur through a self fulfilling prophecies mechanism journal of economic literature classification numbers e12 e32 o41

optimal wage taxation when human capital and employment are endogenous this paper studies how optimal wage tax conclusions from the classic two period life cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers in the absence of a corrective policy young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment a combination of wage taxes and wage subsidies can restore proper price signals numerical simulations suggest that even modest employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates jel h21 h3 j24

human capital accumulation and the optimal level of unemployment insurance provision previous studies of optimal unemployment insurance ui design ignore the impact of ui on human capital investment decisions we show that fully experience rated ui increases investment in human capital when future employment opportunities are not known with certainty in the presence of wage taxation the optimal level of ui trades off full insurance and the impact through human capital of ui on the wage tax base this trade off in turn depends on the extent to which human capital accumulation reallocates labor between market and untaxed nonmarket activities taxation of ui benefits increases the optimal level of ui provision

normal backwardation and the inventory effect the existence of backwardation in futures markets has remained an intriguing and controversial issue since keynes first argued that it was the normal state of affairs most theoretical explanations for the existence of backwardation are quite restrictive among the assumptions are pure forward as opposed to true futures trading differences in probability beliefs degrees of risk aversion or the level of commodity commitments among long and short hedgers in a simple model of short and long commodity hedgers we show that a backwardation equilibrium can occur in a true futures as opposed to forward market even when hedgers are identical in these respects and speculators hold the same probability beliefs as hedgers this result is driven by houthakker s completely neglected intuitive notion that one possible explanation for backwardation is the high correlation between cash and futures prices when inventories of a commodity are large while the simple existence of such an inventory effect does not n

investments in human capital wage uncertainty and public policy abstract the importance of risk characteristics of human capital for the design of tax and education policy is explored wages are uncertain and education while increasing the expected wage may increase or decrease wage variance the government has strong reasons to encourage human capital formation in the latter case partly due to the insurance effect of human capital and partly due to the way the individuals under a plausible restriction on prudence respond to changes in risk the analysis is illustrated using two models of education one where education helps the individuals make better occupational choices and a standard risk augmented becker type model

increasing returns and animal spirits the purpose of this note is to simply point out that the multiplicity intrinsic of course to the presence of non convexities characterizes the models of growth with external increasing returns which have been studied recently and more importantly to show that the many competitive equilibria which often arise in those models can be interpreted as animal spirits equilibria that is equilibria indexed by the consumers optimism or pessimism this multiplicity of competitive equilibrium paths can be viewed as providing a new foundation upon which to build a theory of self fulfilling prophecies one which relies solely on the existence of external effects and does not rest on the overlapping generation structure or on back ward bending offer curves the conclusion that multiple animal spirits competitive equilibria are likely to arise in a model of external increasing returns would survive the generalization of the framework used in this paper to many period environments be they overlapping generation or representative agent infinite horizon structures this abstract was borrowed from another version of this item

taxation of mobile factors as insurance under uncertainty this paper considers the effects of the taxation of mobile factors i e capital under uncertainty the wages earned by residents of a jurisdiction are uncertain due to random shocks since the uncertain wages in a jurisdiction depend on the amount of mobile capital employed in the jurisdiction and since taxation alters the quantity of capital employed taxation affects the riskiness of uncertain wages in particular the taxation of capital moderates the fluctuation of uncertain wages thereby providing insurance for this reason jurisdictions use distortionary capital taxation even if lump sum taxation is available in addition this insurance effect counteracts the tendency toward too low tax rates on capital arising from tax competition and possibly improves the efficiency of tax competition

optimal taxation of risky human capital in a two period life cycle model with ex ante homogeneous households earnings risk and a general earnings function we derive the optimal linear labor tax rate and optimal linear education subsidies the optimal income tax trades off social insurance against incentives to work education subsidies are not used for social insurance but they are only targeted at offsetting the distortions of the labor tax and internalizing a fiscal externality both optimal education subsidies and tax rates increase if labor and education are more complementary because education subsidies indirectly lower labor tax distortions by stimulating labor supply optimal education subsidies taxes also correct non tax distortions arising from missing insurance markets education subsidies internalize a positive negative fiscal externality if there is underinvestment overinvestment in education because of risk education policy unambiguously allows for more social insurance if education is a risky activity however if education hedges against labor market risk optimal tax rates could be lower than in the case without education subsidies

oil and money economic theory and the brent system abstract the world s largest oil trading forum is the brent system consisting of two so called 15 day markets for paper and real oil and the international petroleum exchange ipe in london the problem is that this system s progress toward an efficient and transparent pricing mechanism has not been trouble free although recent innovative departures from conventional futures market practice have reduced the capacity of large oil companies and trading firms to manipulate this market it also seems likely that the progress being made in combining various derivatives will open up new possibilities for commodity risk management

human capital investment and labor supply under uncertainty we extend the theory of human capital investment under uncertainty by incorporating post investment labor supply as a choice variable we show that human capital investment decreases in response to an increase in risk about its return if such investment is an inferior activity and preferences exhibit decreasing risk aversion however if investment is normal then the effect of an increase in risk is indeterminate these results highlight the importance of obtaining empirical evidence on the income elasticity of demand for human capital investment for arriving at refutable hypotheses about the effect of risk

risky higher education and subsidies abstract tertiary education in the u s requires large investments that are risky lumpy and well timed tertiary education is also heavily subsidized our model suggests that despite adverse selection arising from encouraging poorly prepared students to enroll observed collegiate subsidies improve outcomes substantially relative to the fully decentralized case this result occurs because increases in subsidy rates for college education generate reductions in college failure risk without altering mean returns we find that this mechanism is robust and that tertiary subsidy rates well in excess of those observed in the u s can be justified by failure risk alone

growth externalities and sunspots abstract in this paper we consider a simple model of neo classical capital accumulation with production externalities in which a continuum of identical infinitely lived agents produce output from a standard stationary neo classical production technology and choose their actions to maximize a discounted sum of single period utilities because of the presence of the externality in production the model exhibits sunspot equilibria

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

workers applications to social insurance programs when earnings and eligibility are uncertain a worker s decision whether to apply for public transfers may depend not only on his expected level of forgone labor earnings but also on his degree of uncertainty about such earnings this article provides theory and evidence about the effects of earnings and eligibility uncertainty on participation decisions the application rate to the social security disability insurance program is estimated to be about 15 higher than it would be in the absence of earnings risk as an application to tax policy optimal marginal wage tax rates may be higher than indicated in previous analyses involving wage uncertainty

the economic determinants of technology shocks in a real business cycle model abstract creative destruction due to new technologies causes both long run growth and short run business fluctuations new technologies push the economy on a higher productivity level but also imply partial obsolescence of old production units obsolescence induces an adjustment period during which growth rates gradually fall at some endogenously determined point research for the next technology starts once the new technology is discovered a technology shock occurs and the next cycle starts this is shown in a continuous time rbc model with risk averse agents where savings can be used for financing deterministic capital accumulation and stochastic r d for new technologies

rational random walks the paper examines within the framework of a multi dimensional one step forward looking model a special category of rational expectations equilibria their support is infinite with two accumulation points steady states the stochastic motion of the system is of random walk type a general strategy for an existence proof associated with the study of a dynamical systemstresses necessary conditions in a simple overlapping generations model the proof is made complete no backwards bending labour supply is required in the pure sunspot case by continuity heteroclinic random walk equilibria are also shown to exist when shocks are real i introduction many economic models consider exogenous variables that follow stochastic processes of a random walk type the present paper considers a category of rational expectation equilibria in which the path of endogenous variables exhibits a similar qualitative feature the state of the system walks randomly furthermore this random walk takes place between two steady states of the system we call such equilibria random walk because of the temporal stochastic process followed by the equilibrium state heteroclinic because the support of the process connects two steady states in the state space equilibria the paper defines and discusses such equilibria and proposes a general methodology for assessing their existence it shows on a simple example that they do exist they may be either of sunspot type in the case where fluctuations are driven by beliefs only or extrinsic in cass shell 1983 terminology or non sunspot when some underlying fundamentals actually follow a random walk although the study has an exploratory dimension it strongly suggests that the random walk rational expectation equilibria under scrutiny exist within a large class of models in particular an explicit example of sunspot random walk equilibria is exhibited in a subclass of overlapping generations models that do not have traditional sunspot equilibria i e sunspot equilibria triggered by stationary markov processes finally when

information and normal backwardation as determinants of trading performance evidence from the north sea oil forward market this paper utilizes transaction specific data on forward trading in the international petroleum market to test directly predictions from the theory of normal backwardation against information based predictions of trader performance with the ability to identify buyers and sellers the authors find that no traders make significant profits on interday measures within the day however traders likely to have superior information make significant profits the results are not supportive of normal backwardation but are consistent with the time pattern of information dissemination in this market deals made during the day are widely reported only at day s end copyright 1994 by royal economic society

growth effects of shifting from a graduated rate tax system to a flat tax i introduction recently the debate concerning fundamental u s tax reform has led to a number of proposals that involve a shift toward a consumption based system 1 one such proposal is the so called flat tax of hall and rabushka 1995 the flat tax would apply a single tax rate to all labor income above a given threshold and to all capital income after fully expensing investment expenditures hall and rabushka 1995 argue that the adoption of their proposal would provide an enormous boost to the u s economy by dramatically improving incentives to engage in productive activities and would save taxpayers hundreds of billions of dollars in compliance and administration costs 2 in this article we develop a quantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by hall and rabushka 1995 the model captures many of the features of the current u s tax code such as graduated personal tax rates a standard personal deduction separate tax rates applied to personal and business income double taxation of business income and differential tax treatment of physical and human capital under appropriate parameter settings the model can exhibit either endogenous or exogenous long run growth our choice of functional forms facilitates a closed form solution to the model this allows us to characterize explicitly the economy s transition path following the reform a central issue in the debate over fundamental tax reform is the effect that such a reform would have on economic growth the present analysis builds on the work of stokey and rebelo 1995 who use an endogenous growth framework to identify the key model features and parameters that are important for determining the quantitative impacts of distortionary taxes on long run growth 3 our study differs from theirs and the bulk of the dynamic tax literature in one fundamental respect here we evaluate the growth effects of shifting from a graduatedrate tax system to a flat rate system stokey and rebelo 1995 consider only flat rate systems in which the marginal tax rate is equal to the average tax rate we approximate the graduated rate tax system in the u s economy by an empirical tax rate function that allows the personal tax rate to depend positively on household taxable income in equilibrium household decisions are influenced by both the level and slope of the tax schedule to implement the flat tax reform we shift the parameters of the tax rate function to flatten the marginal tax schedule while maintaining revenue neutrality our methodology treats the hall rabushka proposal as one that in effect moves a representative household from one tax rate schedule to another we view this setup as a reasonable approximation to gauge the growth effects of tax reform at the macro level a more elaborate setup would of course allow for household heterogeneity at a given point in time in this regard we note that caucutt et al 2003 have recently examined the growth effects of graduated rate taxes in a two period overlapping generations model that includes both skilled and unskilled agents in their model a flatter tax schedule increases the fraction of skilled agents in the economy the share of total output devoted to education rises accordingly and the economy s long run growth rate is observed to increase the quantitative implications of their model are difficult to compare to ours however because their two period framework implies a very long time horizon between household decisions about 30 years moreover their model abstracts from many of the features of the u s tax code that we include here in addition to examining the consequences of flattening the marginal tax schedule we investigate the growth effects attributable to other parts of the flat tax proposal such as allowing full investment expensing eliminating the double taxation of business income and increasing the standard personal deduction

consumption taxes and economic efficiency with idiosyncratic wage shocks fundamental tax reform is examined in an overlapping generations model in which heterogeneous agents face idiosyncratic wage shocks and longevity uncertainty a progressive income tax is replaced with a flat consumption tax if idiosyncratic wage shocks are insurable i e no risk this reform improves interim efficiency a result consistent with the previous literature but if more realistically wage shocks are uninsurable this reform reduces efficiency even though national wealth and output increase over the entire transition path this efficiency loss in large part stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system

an equilibrium analysis of fiscal policy with uncertainty and incomplete markets insurance aspects of tax policies are studied in a simple intertemporal general equilibrium model in which agents are uncertain about both the future wage rates and the rate of return on capital taxation and lump sum subsidy policies generally reduce employment output and the capital stock but nonetheless they can be structured to provide pareto improvements on the incomplete market equilibrium these policies provide insurance against individual shocks not aggregate shocks examples of welfare maximizing tax schemes are provided using a simple computable general equilibrium model copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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