Top PDF Optimal observability in a linear income tax

Optimal observability in a linear income tax

Optimal observability in a linear income tax

With an imperfect income tax base assessment, a new term appears in the numerator: ( ) w dF 0 y ò > , where ( ) y w º ò Y ¢ U dH C h . This term depicts the marginal social costs from the tax system’s inaccuracy, i.e., the increase in the variance of after-tax income generated by a marginal increase in the tax rate. The new term takes account of two effects. First, with a higher tax rate, individuals bear more risk from a given degree of inaccuracy. 7 Second, due to inaccurate tax base assessment there is a larger dispersion of after-tax incomes within each w -class. Both effects run against the (strictly positive) first term in the numerator, the welfare gains from redistribution reflected in the covariance term. 8 Put simply, inaccuracy reduces the effectiveness of progressive taxation in generating a more equal after-tax income distribution. Hence, the optimal tax rate (and the optimal demogrant) depend not only on the manipulability of the tax base, but also on its observability. While a higher manipulability increases the deadweight loss of a given tax rate per dollar raised, more observability decreases the social costs from inaccurate taxation.
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Working Paper Series. Tax evasion and the optimal non-linear labour income taxation

Working Paper Series. Tax evasion and the optimal non-linear labour income taxation

Since the penalty rule (43) refers to a sufficient condition for the no-evasion condition (11) to be satisfied, one would expect the penalty needed to satisfy (11) to be smaller for risk averse agents. Indeed, when agents are risk-adverse, and thus endowed with a concave utility function, a somewhat smaller penalty may be sufficient to comply the no-evasion condition. Eventually, the penalty could be equal to that imposed by the US system if risk aversion is large. In this case, however, independently of the class of strictly concave utility function chosen to model agents’ preferences, it is not generally possible to explicitly solve equation (11) for the penalty. Numerical simulations suggest that the concavity of the utility function produce a significantly different penalty only when the sheltered income is a large proportion of earned income. In our example, the difference in the penalty to be applied is negligible even for extremely risk averse agents.
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Optimal Income Tax Rates for the Korean Economy

Optimal Income Tax Rates for the Korean Economy

Our results are closely related to those in the existing literature. Aiyagari and McGrattan (1998) developed a heterogeneous agents model with incomplete markets and analyzed the optimal debt policy under the utilitarian social welfare functions. However, while the income tax schedule is linear in their model, we allow for progressive income taxes. HSV (2014) provided a tractable model of optimal tax progressivity. The endogenous labor supply and skill accumulation limits high progressivity—the optimal rate in their model is lower than the current progressivity. Our model embodies capital tax rates and consumption tax rates as well as income tax and focuses on the optimal tax rate for the Korean economy. Our results imply that the optimal tax rate in Korea is much higher and more progressive than the current tax schedule. Chang et al. (2015) computed the optimal income tax rate for each of the 31 OECD countries, including Korea. 1 Under the
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Optimal Income Taxation with Tax Competition

Optimal Income Taxation with Tax Competition

There are important limitations that we share with many optimal-taxation models. First, there is no account of capital, although it should be even more mobile than high-skilled labor. We focus on income taxation because we want to clearly identify the e¤ect of combining competition with the principal– agent framework that underlies optimal taxation models. Second, due to the simple linear production technology in one good economy, there are no general-equilibrium or trade e¤ects of the wage changes that could lead to repercussions on the e¤ects discussed.

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On the Optimal Marginal Rate of Income Tax

On the Optimal Marginal Rate of Income Tax

What the analysis shows is the following result: any qualitative structure for the optimal tax function can be supported by some skill distribution. Expressed alternatively, except for the fact that the marginal rate cannot rise between the second to highest and highest skill consumers, there are no a priori restrictions on the qualitative properties of the optimal tax function. So the structure of the “classical” optimal tax function is just a consequence of the restricted set of simulation specifications and does not capture some deeper feature of optimal taxation. The model used here assumes utility is linear in labor supply. Diamond (1998) has already exploited a linear-in-consumption model to show tax rates may increase above the modal income for some skill distributions.
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The jointly optimal inflation tax, income tax structure, and transfers

The jointly optimal inflation tax, income tax structure, and transfers

and it increases as G increases. In contrast the quadratic part of the income tax structure τ 2 moves from a positive number to increasingly negative numbers. This indicates that the tax structure moves from one which is progressive to ones which are more and more regressive. The rate of money creation λ increases as G increases, but somewhat surprisingly it changes very little and remains negative for all values of G. Also surprising is that the changes in policy decision variables, as well as the changes in other variables in the table, indicate approximate linearity with respect to G. This is surprising because while the model is linear-quadratic with respect to consumption and leisure, it appears to be highly nonlinear with respect to the policy decision variables.
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Optimal Non-Linear Income Taxation in Search Equilibrium

Optimal Non-Linear Income Taxation in Search Equilibrium

When we extend the basic model of optimal income taxation to include a more realistic treatment of the labor market, a number of new interesting mechanisms arise. In the case with exogenous wages we Þnd that a positive external effect from longer work hours gives the government incentive to lower the marginal tax for both skill types. In the endogenous wage model the new mechanisms are more intricate, since the tax system now also affect the bargained wages and thereby also the unemployment rates. Perhaps the most surprising insight is that the government now will, to some extent, use the tax system to redistribute through the unemployment rates. Lower risk of unemployment gives — ceteris paribus — higher expected utility. To transfer utility in the form of low risk of unemployment is a very reÞned way to redistribute, since it does not cause any adverse behavioral effects; the potential mimicker does not enter the low skilleds’ labor market and she therefore cannot beneÞt from lower low skilled unemployment.
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Optimal Piecewise Linear Income Taxation

Optimal Piecewise Linear Income Taxation

Thus, given the optimal choice of tax brackets and of the lump sum a, the tax rates are set optimally over the sub-populations within each bracket. The advantage over a strictly linear tax is therefore that the tax rates can more closely take account of di¤erences in the relationships between income and the marginal social valuation of income, and in the average deadweight losses, across the subsets of the population. This suggests the intuition that there would be little to gain from deviating from a linear ("‡at") tax when the ratio of the equity e¤ect to the e¢ ciency e¤ect remains constant as we move through the wage type distribution. As we show in the numerical analysis in Section 4 below, however, given realistic wage distributions the two bracket progressive tax does deliver higher social welfare than the linear tax, even when the elasticity on gross income with respect to the tax rate is constant throughout the population.
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Unemployment Benefits and Optimal Non-Linear Income Taxation

Unemployment Benefits and Optimal Non-Linear Income Taxation

A case for over-insurance of low-skilled workers arises when the so called self selection constraint (SSC) binds. The SSC ensures that the high-skilled workers prefer the consumption bundle that the government intends for them rather than the consumption bundle intended for the low-skilled workers. This constraint is due to the government’s lack of information about each worker’s skill type. If the high-skilled workers earn the same income as the low-skilled workers, the government cannot levy different tax rates, nor dif- ferent unemployment beneÞts since the beneÞt level is based on the income. In the optimal taxation literature this is called ”mimicking”; the high-skilled workers may mimic the low-skilled workers in order to avoid high taxes. The attractiveness of mimicking generally increases with the level of resources redistributed from high-skilled workers to low-skilled workers. But if unem- ployment is mostly a low-skilled phenomenon, increased low-skilled beneÞts will not increase the attractiveness of mimicking to a large extent. The reason for this is that the mimickers do not beneÞt from the low-skill unemployment beneÞts to the same extent as the low-skilled workers do.
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Optimal income tax enforcement in the presence of tax avoidance

Optimal income tax enforcement in the presence of tax avoidance

In this paper we investigate how accounting for the ability of individuals to avoid tax, as well as to evade tax, alters the conclusions for optimal enforcement of models in which only tax evasion is possible. In our model individuals can engage in tax evasion by under-reporting their income, but can also, at a cost, participate in a tax avoidance scheme that permits them to further lower reported income. Additional to the financial cost of avoidance, both forms of non-compliance are assumed, when detected, to impose psychic harm in the form of a social stigma cost. The nature of the avoidance scheme is not unambiguously prohibited by law, but is unacceptable to the tax authority. Accordingly, if the tax authority learns of the scheme, it will move to outlaw it ex-post. If a taxpayer is audited the tax authority observes whether they are using a tax avoidance scheme and also the extent of any tax evasion. The taxpayer is fined on the evaded tax, but the tax authority has no grounds to impose a fine on the avoided tax (it can only take measures to outlaw the scheme and then recover the tax owed on the avoided income). In this context we characterise the audit function first for a linear penalty function, and later for a general penalty function. The tax authority can condition its audit function only on the amount of income declared; it does not observe the amount of non-compliance or how it is split between evasion and avoidance. We therefore look for a taxpayer such that, if this taxpayer (weakly) prefers to report truthfully rather than hide an amount of income, then all other taxpayers will also wish to report truthfully.
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What Should the Optimal Income Tax Rate Be?

What Should the Optimal Income Tax Rate Be?

As a first step, we needed to consider the specific structure of the labor supply curve. According to relevant literature, the elasticity of supply is mostly positive. [6] estimated elasticity of labor supply to be about 0.12. [7] accounted for the wage differential between part time and full time work, and applied four differ- ent estimation procedures to estimate uncompensated wage elasticities of wom- en’s labor supply. They found elasticities that were always positive. [8] provided a review of estimates of labor supply elasticity. They found several examples of negative wage elasticity estimates. [9] reported backward bending labor supply schedule for self-employed sea-scallop fishermen, who could freely adjust their working hours, unlike employees who are often demand constrained. However, [10] reported that many estimates of elasticities might be biased downwards as a result of the failure to take into account discontinuities in the labor supply func- tion, taxes and non-linear budget constraints.
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Optimal non-linear taxation of labour income

Optimal non-linear taxation of labour income

In the preceding sections source- and origin-based taxes are presented as an indirect means of taxing labour at different rates when the labour tax is linear. However, the informational constraints do not bind the taxation on labour income to be linear: the government does not need to know individual wages and the labour supply in order to implement a nonlinear tax on labour income. Are source- and origin-based taxes still desirable when an optimal nonlinear income tax is levied?

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A Microsimulation Approach to an Optimal Swedish Income Tax

A Microsimulation Approach to an Optimal Swedish Income Tax

tax/benefit model includes benefits from unemployment, disability, long term sickness as well as old age pension. Thus, entries/exits between non-work states and work states are considered in the analyses. This is of particular importance when including effects of in-work tax credit reforms that has become a popular trend in many OECD countries, see Owens (2005). Also, apart from taxes, this study includes changes in transfer systems such as housing and child allowances. An important component in the analyses is the combination of tax/benefit system considered. In contrast to Aaberge & Colombino that used a parameterization of a piecewise- linear tax-system our approach is more related to choosing among politically feasible tax/benefit systems. This is done partly by choosing from a menu of historical taxes during the period 1983 to 2009. Since the historical tax schemes show a wide variability a large range of realistic tax designs are covered. Apart from historical taxes, the tax and benefit rules in 2006 is regarded as a reference, and then a number of modifications are considered, such as changes in levels, brackets and tax credits/deductions as well as changes in benefits. Finally, inspired by the optimal tax literature we also evaluate taxes that are age dependent as well as one variant where the marginal tax rate is set to zero at the highest income. Of all these tax/benefit packages we identify the system that maximizes a social welfare function.
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Optimal Income Tax Reforms: A Microsimulation Analysis

Optimal Income Tax Reforms: A Microsimulation Analysis

This appears to be an attractive route because, unlike the usual approach to op- timal tax modelling, the conditions can be expressed in terms of what appear to be empirically observable counterparts such as elasticities. However, given the consider- able complexities introduced by nonlinear budget constraints — unlike the consump- tion tax case where linear pricing is a reasonable assumption — any clear results need strong assumptions and could only be regarded as illustrative rather than of practical relevance. Nonlinear budget sets make it difficult to generalise regarding labour sup- ply responses and welfare changes even for workers with similar preferences and with relatively simple tax structures. In practice, populations display considerable hetero- geneity in preferences and household circumstances, and tax and transfer structures are extremely complex.
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Optimal Piecewise Linear Income Taxation

Optimal Piecewise Linear Income Taxation

papers leave the literature in a rather un…nished state, despite the fact that the paper by Slemrod et al gives a very thorough and insightful discussion of the results of its simulation analysis of the nonconvex case, as well as of the problem of piecewise linear taxation in a model consisting of only two types. The contribution by Sheshinski was the …rst to formulate and solve the problem of the optimal two-bracket piecewise linear tax system, including the choice of the bracket threshold, for a continuum of worker/consumer- types. However, he claims to have shown that, under standard assumptions, marginal rate progressivity, the convex case, must always hold: in the social
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Revisiting the optimal linear income tax with categorical transfers

Revisiting the optimal linear income tax with categorical transfers

Productivities are Pareto distributed where f (n) = µn µ /n µ+1 ∀ n ≥ n. The Pareto distribution captures well the upper tail of observed income dis- tributions and its adoption in the more recent optimal tax literature has supported increasing marginal tax rates on higher earners. 5 It would there- fore seem appropriate for simulating progressive piecewise tax schedules. To capture how the spread of abilities affects the results, we consider two alter- native distributions: (i) n = 1, µ = 4 ; and (ii) n = 1.067, µ = 5, where n is adjusted so that the average productivity is 1.333 in both cases. The second distribution has a smaller spread of abilities than the first.
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Corrective Taxation of a Consumption Externality in the Presence of an Optimal Non-linear Income Tax

Corrective Taxation of a Consumption Externality in the Presence of an Optimal Non-linear Income Tax

In fact, many developed countries of today rely on environmentally motivated taxes, in order to improve the quality of the environment and there has been an ongoing discussion of how these environmental taxes affect the rest of the tax system. According to economic theory the Pigouvian solution results in a first-best outcome, if there are no other distortions that affect the allocation of resources in the economy. If the government is not able to set the rest of the tax system in an optimal way, that is, no lump-sum taxes or transfers are available, then the government faces a second-best world.
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Optimal Piecewise Linear Income Taxation

Optimal Piecewise Linear Income Taxation

Thus, given the optimal choice of tax brackets and of the lump sum a, the tax rates are set optimally over the sub-populations within each bracket. The advantage over a strictly linear tax is therefore that the tax rates can more closely take account of di¤erences in the relationships between income and the marginal social valuation of income, and in the average deadweight losses, across the subsets of the population. This suggests the intuition that there would be little to gain from deviating from a linear ("‡at") tax when the ratio of the equity e¤ect to the e¢ ciency e¤ect remains constant as we move through the wage type distribution. As we show in the numerical analysis in Section 4 below, however, given realistic wage distributions the two bracket progressive tax does deliver higher social welfare than the linear tax, even when the elasticity on gross income with respect to the tax rate is constant throughout the population.
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An Optimal Linear Income Tax with a Subsidy on Housing

An Optimal Linear Income Tax with a Subsidy on Housing

On the other hand, several authors favor the use of housing subsidies. Cremer and Gahvari (1998) prove that the differential tax treatment of housing may be justified on grounds of optimal tax policy, creating the con- ditions under which consumption of housing by the poor must be subsi- dized. Also Nakagami and Pereira (1995) show that first-time home buy- ers would suffer great utility loss from the elimination of mortgage-interest deductibility.

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Optimal Piecewise Linear Income Taxation

Optimal Piecewise Linear Income Taxation

We would argue that the economic circumstances of households in this type of sample are, at least to some extent, consistent with two assumptions of optimal tax theory - that productivities are innate and cannot be observed and, therefore, that wage rates representing productivities can be treated as exogenous and unobservable. These assumptions cannot plausibly be con- sidered to hold in the case of recipients of disability pensions or long term unemployment bene…ts. Many types of disabilities are observable and disabil- ity pensions are individual-speci…c and not part of the general tax system. In the case of the long term unemployed, the available empirical evidence sug- gests that their earnings possibilities re‡ect the need for further education, training and work experience, implying that a broader set of policy instru- ments than income taxation are relevant, and indeed are in use. We therefore regard the results for the above set of distributions as being the most relevant for the general analysis of tax systems in present-day economies.
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