Ingemar Hansson

Tax revenue and the marginal cost of public funds in Sweden

Abstract We assess the welfare cost of raising a marginal unit of tax revenue in a balanced-budget, general-equilibrium framework. The calculated social cost of an increment of public funds is sensitive to both the specific type of tax increase and the type of public spending used on the margin. ‘Best-guess’ assumptions on labor supply elasticities yield marginal costs of public funds for different fiscal mixes of between 0.67 and 4.51 at prevailing tax rates in Sweden. Alternative labor supply assumptions well within the range of current estimates substantially affect the results and can imply infinite marginal welfare costs. Marginal welfare costs are also sensitive to assumptions about both the income and substitution effects of labor supply.

Marginal Cost of Public Funds for Different Tax Instruments and Government Expenditures

The marginal cost of public funds, that is the size of the direct and indirect (excess burden) costs for marginal tax revenues, is examined in this paper. For an open economy with a savings response and using Swedish 1979 data, the marginal cost of public funds spent on transfer payments is estimated to vary from 1.47 for a distributionally neutral tax on labor and capital to 7.20 for a more progressive tax, where average and marginal labor taxes increase by the same rates. For changes in the most important tax instrument, the marginal cost of public funds varies from 0.98 for expenditures on infrastructure to 2.27 for transfer payments.

The Fisher Hypothesis and International Capital Markets

In a closed economy with interest taxes at rate τ and with a constant real et rate of interest, the nominal rate of interest should rise by 1/(1 - τ) points for every point rise in the expected rate of inflation. However, a large body of empirical work examines the determinants of nominal interest rates and generally finds that the coefficient of expected inflation is close to or less than one. We model the determination of interest rates in an open economy with taxes. Under plausible conditions, increases in inflation cause the nominal interest rate to rise roughly point for point. This suggests that open-capital-market considerations are central for understanding aggregate economic behavior. The analysis also suggests that inflation is not neutral with respect to the real net interest rate earned by domestic savers or paid by domestic borrowers.

Why Is Investment Subsidized

In most economies, investment is subsidized while capital is taxed. This is difficult to explain in a traditional perfect-foresight, representative-agent setting in which a single government sets all current and future taxes on capital. The authors consider a sequential-game setting in which tax policy in a period is determined by the government in power in that period. In equilibrium, investment is subsidized while capital is taxed. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The suboptimality of local taxation under two-tier fiscal federalism

Abstract Increased taxation in a single, local jurisdiction changes the tax base of the national as well as the local government. Changes in national-government tax revenue then affect citizens in other jurisdictions. Local fiscal decisions, which neglect such national spillovers, are suboptimal. If factor supply decreases with the local tax rate, a reduction in tax-financed spending on local-government goods increases welfare. A reduction in tax-financed local-government redistributions increases welfare generally.

Tax Evasion and Government Policy

The effects of government policy that aims to deter tax evasion are examined in a qualitative and quantitative two-sector general equilibrium model. Policy instruments that i) increase disutility from tax evasion and ii) decrease productivity in the tax-evading sector are concluded to decrease tax evasion under specified sufficient assumptions. Counteracting welfare effects are involved. The simulation analysis reveals ambiguous welfare effects for the first and negative welfare effects for the second policy. Tax evasion is also concluded to increase in the tax rate, while a reallocation of government expenditures away from transfers decreases tax evasion.

Public Policy Evaluation when Taxes Matter: The Importance of Second Best

Publisher Summary This chapter discusses the importance of second-best in public policy evaluation. Many traditional analyses of the welfare effects of government policy changes are first-best in the sense that they assume that the policy changes are implemented in an economy that is otherwise free of distortions. This assumption may lead to the neglect of quantitatively important effects in countries like Sweden, where existing taxes drive significant wedges between gross and net prices. The chapter highlights the second-best effects that arise because labor is taxed and presents an analytic expression for the welfare effects of a government policy change in a formal general equilibrium model with initial tax distortions. The chapter identifies the second-best effect and examines the determinants of the effect. The formal analysis is then used as a starting point for a discussion of a number of policy issues, in which second-best effects are potentially a major part of the overall welfare impact of a policy change.

Effects of policy changes on property prices— A simulation model

This paper presents a simulation model designed to predict the impact of policy changes on prices and quantities of owner‐occupied housing in the short and long run. Because liquidity considerations are important, house prices are assumed to depend on cash flow. The model predicts that elimination of interest subsidies in Sweden would cause a 10% short‐run decrease in price for new houses, but that prices would not change for old houses. In the long run, the volume of owner‐occupied housing would decline substantially and prices of old houses would increase by 15–20 %. Introduction of a property tax or a decrease in inflation are predicted to decrease house prices in the short run and to increase them in the long run as the volume of owner‐occupied housing shrinks.