Essays on the distortions from taxation when accounting for heterogeneity.
Creators: name: Wende, Sebastian
Publisher: name: The Australian National University
Year: 2021

description: This thesis comprises three papers which focus on various aspects of the question of which combination of taxes `best' funds government expenditure. The papers take a positive approach to quantifying the distortions created by various taxes. The three papers each focus on different aspects of agent heterogeneity including across: households, firms and resident status tax treatment. The first paper extends marginal excess burden (MEB) analysis of taxes, which has a long tradition in real-world policy making and public finance literature since Harberger (1964), to a dynamic general equilibrium, overlapping generations model featured with household heterogeneity, corporate finance and taxation of corporate and personal income. Our quantitative results indicate a wide disparity in welfare costs of taxes on capital, labour and consumption. At aggregate level, capital taxes result in larger marginal excess burdens than labour and consumption taxes. Importantly, such marginal excess burdens are distributed unequally across households and over time. In particular, older generations with higher income bear the highest MEB of company income tax; meanwhile, future generations bear the highest MEB of personal income tax. Hence, our findings highlight an useful application of MEB analysis in evaluating distributional implications of tax reform proposals. The second paper (Chapter 3) studies the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, MEBs of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the salient features of the 2013 U.S. tax system, reforms that shift tax burden from the firm to household side potentially result in aggregate efficiency gains and overall welfare improving. However, the welfare benefits of these tax reforms are quite different across households and generations over transition, depending on skill type, age-cohort and government budget balancing rule. Thus, our findings highlight the importance of accounting for firm and household heterogeneity when analysing the aggregate and distributional effects of capital income taxation. The final paper (Chapter 4) studies the long run impacts of dividend imputation in a model with firm heterogeneity, financial constraints and differential tax treatment of resident and foreign investors. Dividend imputation is designed to mitigate the adverse effects of double capital taxation by providing to tax credits to shareholders for the corporate tax paid by firms. However, these tax credits are only able to be distributed proportionally to dividends creating possible distortions. Further, dividend imputation has primarily been extended to resident investors and not non-residents. As such, we model the impacts for dividend imputation and residency rules for capital taxation. To do so we formulate a computable general equilibrium with a continuum ex-post heterogeneous firms, overlapping generations of resident households and also non-resident investors. We capture a personal and corporate income tax system with dividend imputation and firms who face financial constraints. We find dividend imputation for residents raises resident saving, the aggregate capital stock and output. However imputation does create distortions which shift the allocation of capital and lower aggregate productivity. More generally, in our framework, foreign capital is an imperfect substitute for resident capital, despite assuming perfect foreign capital mobility.