44,490 research outputs found

    Optimal Taxation under a Consumption Target

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    While in the familiar problem of optimal commodity taxation the government faces a constraint on tax revenue, we consider the case of a consumption target on a group of commodities (i.e.,a weak constraint on total consumption), instead. This optimal commodity tax problem with a consumption target brings about taxation rules that are mainly at variance with the standard results of commodity taxation. In our main theorem, we derive a general, though quite simple, rule of optimal commodity taxation under a target on total consumption: in particular, we establish that higher consumer prices should be charged for commodities with (1) high price elasticities of total demand and (2) low consumption shares in total demand. From this theorem we deduce three important corollaries: an anti-inverse elasticity result, an anti-Corlett– Hague result and a uniform-pricing result. All of these results are (generically) at variance with well-known rules of commodity taxation

    On the Generalised Anti-inverse Elasticity Rule: An Existence Result

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    We consider an optimal commodity taxation problem under a consumption target and prove the existence of an optimal solution for the problem. This optimal solution obeys taxation rules that are contrary to standard taxation rules such as the inverse-elasticity rule. We also verify the necessary and sufficient condition for the optimal solution to exhibit uniform pricing

    Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility

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    The effects of stochastic oil demand on optimal oil extraction paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic. Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle. Volatile oil demand brings forward oil extraction and induces a bigger government surplus. With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if non]oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction. In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated.Hotelling rule, tax smoothing, prudence, vigorous oil extraction, precautionary saving, taxation and under-spending, oil price volatility, uncertain economic prospects and oil reserves

    Taxing capital? : not a bad idea after all!

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    In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about 6,000(relativetoanaverageincomeofhouseholdsinthemodelof6,000 (relative to an average income of households in the model of 35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system. Klassifizierung: E62, H21, H2

    Debt stabilization in a Non-Ricardian economy

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    In models with a representative infinitely lived household, tax smoothing implies that the steady state of government debt should follow a random walk. This is unlikely to be the case in overlapping generations (OLG) economies, where the equilibrium interest rate may differ from the policy maker's rate of time preference. It may therefore be optimal to reduce debt today to reduce distortionary taxation in the future. In addition, the level of the capital stock in these economies is likely to be suboptimally low, and reducing government debt will crowd in additional capital. Using a version of the Blanchard-Yaari model of perpetual youth, with both public and private capital, we show that it is optimal in steady state for the government to hold assets. However, we also show how and why this level of government assets can fall short of both the level of debt that achieves the optimal capital stock and the level that eliminates income taxes. Finally, we compute the optimal adjustment path to this steady state

    On the optimal progressivity of the income tax code

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    This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17:2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1:7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible. JEL Klassifikation: E62, H21, H24

    Fiscal sustainability in a new Keynesian model

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    Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. In this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government's objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi-commitment policy, which allows for different probabilities of reneging on past promises

    The distributional consequences of tax reforms under capital-skill complementarity

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    This paper analyses wage inequality and the welfare effects of changes in capital and labour income tax rates for different types of agents. To achieve this, we develop a model that allows for capital–skill complementarity given non-uniform distributions of asset holdings and labour skills. We find that capital tax reductions lead to the highest aggregate welfare gains but are skill-biased and thus increase inequality. However, our analysis also shows that the inequality effects of capital tax reductions are lower over the transition period compared with the long run

    Optimal progressive taxation in a model with endogenous skill supply

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    Price Stability vs. Low Inflation in Germany: An Analysis of Costs and Benefits

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    We empirically investigate the costs and benefits of going from low inflation to price stability in the case of Germany. Recent empirical evidence on the sacrifice ratio suggests that the break-even point at which the permanent benefits of reducing the trend rate of inflation by 2 percentage points exceeds the temporary costs in terms of output losses is below 0.3% of GDP. We analyze the welfare implications of the interactions even of moderate rates of inflation with the distorting effects of the German tax system. Four areas of economic activity are considered: intertemporal allocation of consumption, demand for owner-occupied housing, money demand, and government debt service. We estimate the direct welfare effects of reducing the rate of inflation as well as the indirect tax revenue effects. We find that reducing the inflation rate by 2 percentage points permanently increases welfare by 1.4% of GDP. Finally, the optimal rate of disinflation is considered.
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