Income Taxation, Old Age Pensions and Disability Benefits

This paper concerns two issues related to optimal income taxation. First, we show how the labor income tax and the old age pension system interact in the optimal tax and expenditure structure. Second, we derive marginal capital income tax rates for high-ability and low-ability working individuals as well as for the disabled.Optimal Taxation; Pension; Welfare Programs

Externalities, Border Trade and Illegal Production: An Optimal Tax Approach to Alcohol Policy

This paper deals with optimal income and commodity taxation in an economy, where alcohol is an externality-generating consumption good. In our model, alcohol can be bought domestically, imported (via border trade) or produced illegally. Border trade implies an incentive to set the domestic alcohol tax below the marginal social damage of alcohol, and to tax (subsidize) commodities which are complementary with (substitutable for) alcohol. In addition, since leisure and alcohol consumption are generally nonseparable, the income tax will also be used as a corrective instrument. On the other hand, the desire to reduce the illegal production may generally affect the optimal income and commodity taxes in either direction. One possible (and arguably realistic) outcome is, nevertheless, that the desire to avoid the illegal production works to reduce both the alcohol tax and the marginal income tax rate.taxation; external effects; alcohol; border trade.

Is the Optimal Labor Income Tax Progressive in a Unionized Economy?

This paper concerns optimal nonlinear labor income taxation in an economy with union wage setting and endogenous hours of work. The government is assumed to act in accordance with a utilitarian objective function. The main purpose of the paper is to study the determinants of tax progression and, in particular, to relate tax progression to the choice of work hours. We show how the optimal degree of tax progression depends on the incentives underlying the choice of work hours, as well as on whether or not the government can monitor the wage rate via tax policy. If the wage rate is chosen by the union member with median seniority, in which case the wage rate will be fixed under certain conditions, the marginal tax rate is unambiguously positive and the tax structure unambiguously progressive. If, on the other hand, the union acts according to the utilitarian framework, we can no longer in general rule out regressive tax systems. We also show that the tax system is more likely to be progressive if the individual union members freely choose their hours of work conditional on the wage rate, than if the union is able to directly affect the hours of work per employee.Optimal taxation; labor supply; union wage setting

Optimal Income Taxation and Social Norms in the Labor Market

This paper concerns optimal income taxation in a two-type model extended to allow for social interaction and social norms in the labor market. One type of norm relates to the hours of work among the employed, and we assume that there is a cost associated with deviating from 'normal behavior' (defined in terms of the average hours of work). Another type of norm refers to the pressure of earning one's living by working, where social interaction means that the perceived cost of being out of employment depends on the share of nonworkers in the population. The results show how, and why, the existence of social norms may modify results derived in earlier literature. Under reasonable assumptions, the norm referring to normal behavior in term of work hours provides an incentive for the government to increase the hours of work supplied by the high-ability type relative to the hours of work supplied by the low-ability type, whereas the norm of 'earning one's living by working' strengthens the employment-motive behind tax policy.Optimal Taxation; Social Interaction; Norms

Environmental Policy and Optimal Taxation in a Decentralized Economic Federation

This paper deals with environmental policy in an economic federation, where each national government faces a mixed tax problem. We assume that the federal government sets emission targets, which are implemented at the national level. We also assume that the economic federation is decentralized, meaning that the national governments are first movers vis-a-vis the federal government. Our results show that each country uses it policy instruments, at least in part, to influence the emission target. This has several implications; first, the commodity taxes do not satisfy the so called additivity property often emphasized in earlier literature and, second, it provides an argument for using distortionary labor income taxation.Income and commodity taxation; economic federation; environmental policy

Optimal Taxation and Transboundary Externalities - Are Endogenous World Market Prices Important?

This paper concerns income and commodity taxation in a multi-jurisdictional framework with transboundary environmental damage. We assume that each jurisdiction is large in the sense that its government is able to influence the world market prices via public policy. In such a framework, a noncooperative Nash equilibrium does not only imply that the commodity tax on the externality-generating good is inefficiently low seen from the perspective of global well-being; it also means that the marginal income tax rate is inefficiently high, and that too much resources are spent on public goods. With the noncooperative Nash equilibrium as a starting point, we also consider the welfare effects of policy coordination with respect to taxation and public expenditures.Trade and Environment; Optimal Taxation; Externalities

Mixed Taxation, Public Goods and Transboundary Externalities: A Model with Large Jurisdictions

This paper concerns income taxation, commodity taxation, production taxation and public good provision in a multi-jurisdiction framework with transboundary environmental damage. We assume that each jurisdiction is large in the sense that its government is able to influence the world-market producer price of the externality-generating commodity. The decision-problem facing the government in each such jurisdiction is represented by a two-type model (with asymmetric information between the government and the private sector). We show how the possibility to influence the world-market producer price adds mechanisms of relevance for redistribution and externality-correction which, in turn, affect the domestic use of taxation and public goods. Finally, with the noncooperative Nash equilibrium as a reference case, we consider the welfare effects of policy coordination.Trade and Environment; Optimal Taxation; Externalities

Environmental Policy and Product Specialization

This paper characterizes income and commodity taxation as the outcome of a noncooperative Nash game in a two-country economy where one of the countries produces an environmentally clean good, while the other produces a dirty good. Among the results, it is shown that the commodity tax on the dirty good implemented by each country does not contain any term that directly serves to correct for the external effect. Instead, the country producing the dirty good internalizes part of the domestic external effect by choosing a relatively high marginal income tax rate.Trade and Environment; Optimal Taxation; Externalities.

A Note on Environmental Policy Reform, Distortionary Taxation and Imperfect Competition

This paper concerns the welfare effects of public abatement projects, and concentrates on the influence of distortionary taxes and imperfect competition in the labor market. In addition to the direct environmental benefits and costs of resource use, abatement policies give rise to welfare effects via the tax system as well as via changes in the employment. We also show how the cost benefit rule is modified, if the other policy instrument are optimally chosen conditional on the level of abatement.Environmental policy; distortionary taxation; the labor market

Does Wage Bargaining Justify Environmental Policy Coordination?

This paper analyzes the welfare consequences of coordinated tax reforms in an economy where a transboundary environmental externality and an international wage bargaining externality are operative at the same time. We assume that the wage in each country is decided upon in a bargain between trade-unions and firms, and the wage bargaining externality arises because the fall-back profit facing firms depends on the profit they can earn if moving production abroad. Using the noncooperative Nash equilibrium as a reference case, our results imply that the international wage bargaining externality may either reinforce or weaken the welfare gain of a coordinated increase in environmental taxation, depending on (among other things) how the reform affects the wage. For a special case, we also derive an exact condition under which a coordinated increase in the environmental tax leads to higher welfare.Environmental taxes; externalities; policy coordination; trade-unions