R.H.J.M. Gradus

Optimal dynamic taxation with respect to firms

In this paper we develop a framework for determining optimal profit taxation in a market economy with value-maximising firms, which face costs of adjustment for investment. The government chooses this tax rate in such a way that the utility of the consumer, which depends on public and private consumption will be maximised. The private consumption is financed by wage income and dividend, while public consumption is financed by tax revenues. We show that there is a dynamic trade-off between public consumption now and in the future. Two possible solutions are derived. The first solution, which is the formal outcome of an open-loop Stackelberg equilibrium of a game between government and firms, is time-inconsistent and is only credible, if there is commitment or if there are reputational forces. The second solution, which corresponds to a feedback Stackelberg equilibrium, is time-consistent, but yields a lower value of steady-state utility.

CORPORATE TAX RATE POLICY AND PUBLIC AND PRIVATE EMPLOYMENT

Abstract High tax revenues give the government the opportunity to create public employment. However, if the government tries to increase total tax revenues by increasing the corporate tax rate, two negative effects are invoked. Investment decreases, so that generally future tax revenues and private employment decrease. With the purpose to analyse this trade-off a dynamic game between the government and a representative firm is formulated. The governments objective is maximal total employment and the governments instrument is a corporate tax rate policy. The firms objective is maximal total dividends and the firms instrument is an investment rate policy. In general it is optimal for the government to start with a low corporate tax rate and to end with a high corporate tax rate. However, the switching time depends on the credibility and reputation of the government. If the government is committed to an announced policy, even if this announced policy becomes suboptimal over time, and if the firm is expected to believe so, the open-loop Stackelberg outcome of the game results. If the government is not committed to an announced policy and if the firm expects rational behaviour of the government at all times, the feedback Stackelberg outcome results. It is shown that in the open-loop outcome the switch in policy occurs later and the results are better for both the government and the firm than in the feedback outcome. Finally, the sensitivity of this switching time with respect to the capital/labour intensiveness is investigated.

Optimal Dynamic Taxation, Saving and Investment

In many recent papers macro-economic models have been developed to study the dynamic evolution of the economy in order to analyze dynamic effects of fiscal policy (e.g. Hall (1971), Brock and Turnovsky (1981), Abel and Blanchard (1983), Judd (1985) and Van de Klundert and Peters (1986)). Aim of these papers is to investigate the incidence of different tax rates such as a tax on profits, a sales tax, a wage tax or a consumption tax with the help of optimal control theory. However, in these kinds of models the tax rates are given exogenously.

Corporate Tax Rate Policy and Public and Private Employment

Abstract High tax revenues give the government the opportunity to create public employment. However, if the government tries to increase total tax revenues by increasing the corporate tax rate, two negative effects are invoked. Investment decreases. so That generally future tax revenues and private employment decrease. With the purpose to analyse this trade-off a dynamic game between the government and a representative firm is formulated. The governments objective is maximal total employment and the governments instrument is a corporate tax rate policy. The firms objective is maximal total dividends and the firms instrument is an investment rate policy. In general it is optimal for the government to start with a low corporate tax rate and to end with a high corporate tax rate. However, the switching time depends on the credibility and reputation of the government. If the government is committed to an announced policy, even if this announced policy becomes suboptimal over time, and if the firm is expected to believe so, the open-loop Stackelberg outcome of the game results. If the government is not committed to an announced policy and if the firm expects rational behaviour of the government at all times, the feedback Stackelberg outcome results. It is shown that in the open-loop outcome the switch in policy occurs later and the results are better for both the government and the firm than in the feedback outcome. Finally, the sensitivity of this switching time with respect to the capital/labour intensiveness is investigate.