Lans Bovenberg

The optimal taxation of unskilled labor with job search and social assistance

Abstract In order to explore the optimal taxation of low-skilled labor, we extend the standard model of optimal nonlinear income taxation in the presence of quasi-linear preferences in leisure by allowing for involuntary unemployment, job search and an exogenous welfare benefit. In trading off low-skilled employment against work effort of higher skilled workers, the government balances distortions on the search margin with those on work effort. Higher welfare benefits typically reduce taxes paid by low-skilled workers and raise marginal tax rates throughout the skill distribution.

Monetary and fiscal policy interaction and government debt stabilization

Employing differential games, this paper models the strategic interaction between monetary authorities who control monetization and fiscal authorities who control primary fiscal deficits. We analytically compute and interpret the cooperative and noncooperative Nash open-loop equilibria. Furthermore, we reinterpret unpleasant monetarist arithmetic and analyze the impact of a more conservative central bank. Finally, to explore the consequences of a more independent central bank, we analyze Stackelberg open-loop equilibria.

The future of multi-pillar pensions

Pension systems are under serious pressure worldwide. This pressure stems not only from the well-known trend of population aging, but also from those of increasing heterogeneity of the population and increasing labour mobility. The current economic crisis has aggravated these problems, thereby exposing the vulnerability of many pension schemes to macroeconomic shocks. This book reconsiders the multi-pillar pension scheme against the background of these pressures. It adopts an integral perspective and asks how the pension system as a whole contributes to the three basic functions of pension schemes: facilitating life-cycle financial planning, insuring idiosyncratic risks and sharing macroeconomic risks across generations. It focuses on the optimal balance between the various pension pillars and on the optimal design of each of the schemes. It sketches a number of economic trade-offs, showing that countries may opt for different pension schemes depending on how they react to these trade-offs.

Optimal welfare and in-work benefits with search unemployment and observable abilities

This paper explores the optimal interaction between the tax system and social assistance in insuring people against the risks of involuntary unemployment and low ability. To that end, we introduce search unemployment in a model of optimal non-linear income taxation. The relationship between welfare benefits and the optimal level of in-work benefits is U-shaped. This explains why in-work benefits are called for both in countries that grant low welfare benefits and countries that provide high welfare benefits. An earned-income tax credit optimally induces all agents to look for work if job search is cheap and effective, agents are not very risk averse, and the least-skilled agents are relatively productive.

Introduction : Tax coordination in the European Union

The seven papers in this issue grew out of a conference on Tax Policy in the European Union organized by the Research Centre for Economic Policy (OCFEB) of Erasmus University Rotterdam and held at the Dutch Ministry of Finance in The Hague. The first paper reviews the issues and options that the EU Member States face in coordinating their tax systems. The following three papers examine tax competition issues, the effects of corporation taxes on foreign direct investment, and two proposals for common base taxation contained in the European Commission’s report on Company Taxation in the Internal Market, published at the time of the conference. Then there is paper focusing on the implications of aging populations for old-age support—a problem that is more acute in most EU Member States than elsewhere. The two remaining papers deal with the most appropriate value-added tax (VAT) regime for handling goods entering intra-EU trade and the application of the VAT to electronic commerce in the EU.

Reforming occupational pension schemes: the case of the Netherlands

In many countries, occupational plans are being reformed away from defined-benefit (DB) to defined-contribution (DC) designs. This paper explores the case of the Netherlands, which features a particularly high ratio of occupational pension assets to GDP. Dutch occupational DB plans suffer from a number of serious weaknesses, including ambiguous ownership of assets, back-loading of benefits, and lack of tailor-made risk management. To address these weaknesses, we propose collective individual DC plans that are actuarially fair. These schemes maintain important strengths of collective schemes, such as mandatory saving, collective procurement, and pooling of biometric risks. At the same time, they eliminate intergenerational conflicts about risk management and distribution through transparent individual property rights on financial assets and tailor-made risk profiles in individual accounts. We show how the transitional burden due to phasing out the back-loading of pension benefits can be addressed without a substantial increase in contributions.

Public Economics and the Environment in an Imperfect World: An Introductory Summary

In less than a decade, environmental economics has matured from little more than a special application of Pigovian taxation to a full-fledged branch of the economics discipline. Various developments have contributed to this. Growing populations and economies, for instance, have increased people’s awareness that the world’s environmental resources are limited. Also, the depletion of the ozone layer and the possibility of global warming have given universal significance to what were hitherto mostly local and regional pollution problems. The environment has emerged as a truly public good. Generally, Coasian negotiations fail to internalize the costs of environmental degradation. Thus, public intervention, if possible through the market mechanism, is called for. The intervention measures, however, are designed and implemented by imperfect people using imperfect instruments applied in imperfect markets.

Personal pensions with risk sharing

To improve the design of the pay-out phase of DC plans, this paper proposes a new approach to structure pension products: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous individuals. Unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year-on-year volatility in consumption streams or opaque and rigid valuation and smoothing rules. The synthesis of a PPR structure provides new opportunities for product innovation and for the comparison of retirement products.

Innovative Institutions and Products for Retirement Provision in Europe

The institutional settings related to pension provision differ widely within Europe. In some countries, income transfers within families are still very important. In other countries, major parts of pension provision are delegated to large financial conglomerates. Some countries rely almost exclusively on public pay-as-you-go (PAYG) systems. In others, private funded pension systems are important. A wide diversity of funded systems exists in Europe. Some countries feature DB (defined benefit) plans in which participation is mandatory, the sponsor absorbs most risks, pension entitlements are paid out as annuities and uniform pension products are offered to all participants. Funded systems in other countries are of the individual DC (defined contribution) type in which participants themselves take all savings and investment decisions and usually face substantial investment, inflation and conversion risk.