chapter 16 efficient and equitable taxation copyright © 2010 by the mcgraw-hill companies, inc. all...
TRANSCRIPT
CHAPTER 16
Efficient and Equitable Taxation
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
16-2
Optimal Commodity Taxation
w(T – l) = PXX + PYY
wT = PXX + PYY + wl
wT = (1 + t)PXX + (1 + t)PYY + (1 + t)wl
1 wT = PXX + PYY + wl 1 + t
16-3
The Ramsey Rule
X per year
PX
DX
P0
X0
c
P0 + uXb
X1
∆X
a
ExcessBurden
P0 + (uX + 1) f
X2
i
∆x
ej
h
g
MarginalExcessBurden
marginal excess burden = area fbae = 1/2∆x[uX + (uX + 1)] = ∆X
16-4
The Ramsey Rule Continued
change in tax revenues = area gfih – area ibae = X2 – (X1 – X2)uX
marginal tax revenue = X1 ∆X
marginal tax revenue per additional dollar of tax revenue = ∆X/(X1 - ∆X)
marginal tax revenue per additional dollar of tax revenue for good Y = ∆Y/(Y1 - ∆Y)
To minimize overall excess burden = ∆X/(X1 - ∆X) = ∆Y/(Y1 - ∆Y)
therefore X
X
Y
Y1 1
16-5
A Reinterpretation of the Ramsey Rule
t
tX
Y
Y
X
inverse elasticity rule
t tX X Y Y
16-6
The Corlett-Hague Rule
• In the case of two commodities, efficient taxation requires taxing commodity complementary to leisure at a relatively high rate
16-7
Equity Considerations
• Equity implications of inverse elasticity rule
• Vertical equity
• Optimal departure from Ramsey Rule
16-8
Application: Taxation of the Family
• Under federal income tax law, fundamental unit of income taxation is family
• Is excess burden minimized by taxing each spouse’s income at same rate?
• Should husbands face higher marginal tax rates than wives?
16-9
Optimal User Fees
Z per year
$ A Natural Monopoly
DZMRZ
ACZ
MCZ
ZM
PM
ACM
Z*
P*
ZA
Marginal Cost Pricing withLump Sum Taxes
Benefits received principle Average Cost Pricing A Ramsey Solution
16-10
Optimal Income Taxation-Edgeworth’s Model
• W = U1 + U2 + … + Un
• Individuals have identical utility functions that depend only on their incomes
• Total amount of income fixed
• Implications of model for income tax
16-11
Optimal Income Taxation-Modern Studies
• Supply-side responses to taxation
• Linear income tax model (flat income tax)
– Revenues = -α + t * Income
• Stern [1987]
• Gruber and Saez [2002]
IncomeT
ax R
even
ue
α = lump sumgrant
t = marginaltax rate
16-12
Politics and the Time Inconsistency Problem
• Public choice analysis of tax policy
• Time inconsistency of optimal policy
16-13
Other Criteria for Tax Design
• Horizontal equity– Utility definition of horizontal equity
• Transitional equity– Rule definition of horizontal equity
16-14
Costs of Running the Tax System
• Costs of administering the income tax in the U.S.
• Types of costs– Compliance– Administration
16-15
Tax Evasion
• Evasion versus Avoidance
• Policy Perspective: Architectural Tax Avoidance
• Methods of tax evasion– Keeping two sets of books– Moonlight for cash– Barter– Deal in cash
16-16
Positive Analysis of Tax Evasion
(Dollars of underreporting)(Dollars of underreporting)
$ $MC = p * marginalpenalty
MC = p * marginalpenalty
MB = tMB = t
R* R* = 0
16-17
Costs of Cheating
• Psychic costs of cheating
• Risk aversion
• Work choices– Underground economy
• Changing Probabilities of Audit
16-18
Normative Analysis of Tax Evasion
• Tax evaders given weight in the social welfare function
• Tax evaders given no weight in the social welfare function– Expected marginal cost of cheating = penalty rate
* probability of detection– Probability of detection = f (resources devoted to
tax administration)– Draconian vs. just retribution penalties