The recent public economics literature involves an apparent consensus that income effects reduce the costs of raising revenues and hence increase the desirable level of public good provision. Higher taxes can indeed reduce the demand for leisure — and hence increase the supply of taxed labor — through income effects. However, the consensus is wrong because the income effects of taxes must be considered symmetrically with those from provision of public goods. This paper uses a model with multiple public goods and taxes to derive consistent measures of the marginal benefits of publicly-provided goods and their marginal social costs. With this model, the authors show that either compensated approaches excluding these income effects or uncompensated approaches including them may be used. If an uncompensated measure of the marginal cost of funds is used, however, the benefits of providing public goods should be adjusted with a simple, benefit multiplier not previously seen in the literature. Once this is done, the optimal level of public provision is independent of whether compensated or uncompensated approaches are used. Proper accounting for these income effects — or their omission using a compensated approach — appears to substantially raise the hurdle for government provision where there are substantial taxes bearing on labor.
The federal government offers an array of tax-based aid student aid programs designed to lower the cost of postsecondary attendance. Many taxpayers are eligible for more than one program, yet they are limited to one program per student per year. Analyzing a unique panel dataset of individual income tax returns from the U.S. Internal Revenue Service, I find that many taxpayers do not select the single tax-based aid program that offers the largest reduction in combined federal and state taxes. In this paper, I offer three explanations for this pattern of taxbased aid selection. First, I show that salience of federal tax effects causes some taxpayers to select a program that minimizes federal taxes rather than combined state and federal taxes. Second, I show that inertia in program selection causes some taxpayers to default into options offering a smaller reduction in tax liability. Third, I find evidence that suggests some non taxminimizing claims are cases of tax evasion.
tax salience; inertia, default behavior; tax evasion; tax-based student aid
While acknowledging the importance of fairness and the need to avoid creating disincentives in the design of tax reform, the Henry Review recommends a simplified Personal Income Tax and child payments withdrawn on a single family income test. This paper shows that the proposed reforms would consolidate the existing family tax system, which clearly fails in terms of both fairness and disincentives. In the early 1980’s Australia had a highly progressive individual income tax and universal family payments. Since then family income tests on child payments and tax cuts at high income levels have transformed the system into one of joint taxation with the highest marginal rates on low and average wage two-earner families. Under the Review’s recommendations the same families would continue to face the highest tax rates. Data presented indicate strong negative effects on productivity and the tax base due to disincentive effect s on labour supply and saving over the life cycle. The paper proposes a return to a strongly progressive individual based income tax and universal family payments.
Taxation, Family payments, Time allocation, Labour supply, Saving, Life cycle
Payroll Taxes, Social Insurance and Business Cycles
Burda, Michael C. (Humboldt University, Berlin)
Weder, Mark (University of Adelaide)
Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of payroll taxation and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget renders gross wages more rigid over the cycle and, as a result, strengthens the model’s endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve as well as substantial volatility and persistence of vacancies and unemployment.
business cycles, labor markets, payroll taxes, unemployment, consumption-tightness puzzle
This paper calculates the optimal gasoline tax for the state of California. According to our analysis, the optimal gasoline tax in California is $1.37/gallon, which is over 3 times the current California tax when excluding sales taxes. The Pigovian tax is the largest part of this tax, comprising $0.85/gallon. Of this, the congestion externality is taxed the most heavily, at $0.27, followed by oil security, accident externalities, local air pollution, and finally global climate change. The other major component, a Ramsey tax, comprises a full $0.52 of this tax, reflecting the efficiency in raising revenues from a tax on gasoline consumption due to the inelastic demand of this consumption good.
Extension of the wealth tax to agriculture, it will be recalled, was opposed on the ground that it would hurt even the small and medium-sized farmers. This argument was advanced in spite of agricultural holdings below the value of Rs.1 lakh being exempted from the tax. The opposition to the tax came from even .political parties and groups generally associated with radical policies, some of whom cautiously refrained from defining who precisely constituted the small and medium-sized farmers. [Working Paper No. 12]