Sören Blomquist

Public Provision of Private Goods as a Redistributive Device in an Optimum Income Tax Model

Public provision of a private good can alleviate the informational problems that restrict redistribution through the tax/transfer system when the identity of high- and low-skill persons is hidden. A Pareto improvement may be achieved by publicly providing a private good and letting each consumer choose between accepting the provision or buying the good on the market. The authors characterize goods that are suitable for public provision. Various kinds of social optima, conditional on the nature of preferences and the parameters of the economy, are distinguished and characterized. One or both types of persons may opt for public provision at the social optimum. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

Estimation methods for male labor supply functions How to take account of nonlinear taxes

Abstract Nonlinear taxes create econometric difficulties when estimating labor supply functions. One estimation method that tackles these problems accounts for the complete form of the budget constraint and uses the maximum likelihood method to estimate parameters. Another method linearizes budget constraints and uses instrumental variables techniques. Using Monte Carlo simulations I investigate the small-sample properties of these estimation methods and how they are affected by measurement errors in independent variables. No estimator is uniquely best. Hence, in actual estimation the choice of estimator should depend on the sample size and type of measurement errors in the data. Complementing actual estimates with a Monte Carlo study of the estimator used, given the type of measurement errors that characterize the data, would often help interpreting the estimates. This paper shows how such a study can be performed.

The political economy of subsidized day care

In a simple model of day care enrollment and labor supply, we have shown that in countries like Sweden where wages are taxed at about 60\%, the governments tax revenue, net of day care subsidies, is likely to be maximized with subsidies covering more than half of day care costs. In contrast, in countries where the marginal tax rate on wages is about 40\%, the subsidy rate that maximizes net government revenue is likely to be between 15\% and 30\%. We also studied the workings of day care subsidies in a federal system. If both federal and local governments collect income taxes and if day care subsidies are set locally, then the subsidy rates chosen by selfish voters in local elections would be lower than the rates they would choose for federal subsidies. In this model all voters are better off if day care subsidy rates are set by the federal government, with voters simultaneously deciding the rate for the entire federation.

Age related optimal income taxation

In most countries, average income varies with age. In this paper we investigate if and how it is possible to enhance the redistributive mechanism by relating tax payments to age. Using an OLG model where some individuals are low skilled all their life while others are low skilled when young but high skilled when old, we first show how an age dependent optimal income tax can Pareto improve upon an age independent income tax. We then characterize the optimal age dependent income tax. A tax on interest income is part of the optimal tax structure.

Price Subsidies Versus Public Provision

The paper investigates whether price subsidization or public provision of a private good, x, is the more efficient redistributional instrument in addition to an optimal nonlinear income tax. The identity of high and low skill individuals is assumed to be private information generating a self-selection constraint. If the high skill persons consumption of x is sufficiently large relative to that of the low skill person, public provision is the better scheme. With the opposite situation the price subsidy may be the preferred instrument. The paper also characterizes the mixed scheme where all the instruments are used optimally. The mixed scheme can be degenerate with only public provision being used in addition to the income tax. At an optimum where both instruments are used, good x is subsidized, the low skill person is supplementing and the high skill person is forced to overconsume.

Tax reform evaluation using non-parametric methods: Sweden 1980–1991

Abstract This paper evaluates the tax reform carried out in Sweden between 1980 and 1991. We use a recently developed non-parametric estimation technique to account for the labor supply responses of married prime aged males. We decompose the tax reform to study how the separate components influence hours of work, tax revenue, and income distribution. We find that the decrease in marginal tax rates stimulated labor supply but that the other parts of the reform counteracted this effect. The net increase in average desired hours of work was approximately 2%. We also find that the reform was under financed and that inequality increased. The non-parametric predictions are compared to the results based on a flexible parametric model. The qualitative results are similar, but the quantitative results are quite different.

Taxation and Heterogeneous Preferences

Non-linear income taxes and linear commodity taxes are analysed when people differ with respect to ability, high-skilled agents have heterogeneous preferences, and neither individual abilities nor preferences are observable. The paper highlights how informational constraints may motivate differential treatment of people with different preferences for leisure even if unequal treatment is not desirable per se. Which preference type will be better or worse off is shown to depend on the self-selection constraints associated with the information asymmetry. We characterize pure income tax optima, which may be bunching or separating optima. In particular, the income tax may not be able to distinguish between those low-income people who are low-skilled and those who have strong preference for leisure. As is shown, there may still be an impact on the optimum income tax schedule as it will depend on the composition of the population with respect to types of individuals. Finally, the paper addresses what can be achieved by commodity taxes when preferences are heterogeneous, in particular, in terms of targeting groups that the income tax is incapable of discriminating between.

Redistribution and provision of public goods in an economic federation

This paper concerns redistribution and provision of public goods in an economic federation with two levels of government: a local government in each locality and a central government for the economic federation as a whole. We assume that each locality is characterized by two ability-types (high and low), and that their distribution differs between localities. The set of policy instruments facing the central government consists of a nonlinear income tax and a lump-sum transfer to each local government, while the local governments use proportional income taxes and the transfers from the central government to finance the provision of local public goods. The purpose is to characterize the tax and expenditure structure in a decentralized setting, where the central and local governments have distinct roles to play, and also compare this tax and expenditure structure with the second best resource allocation. We show how the redistributive role of taxation is combined with a corrective role, since tax base sharing among the central and local governments gives rise to a vertical fiscal external effect. In addition, the central government does not in general implement the second best resource allocation with the instruments at its disposal.

The Welfare Gains Of Age‐Related Optimal Income Taxation

Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear- as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.

Restrictions in labor supply estimation: Is the MaCurdy critique correct?

According to the MaCurdy critique the Hausman method implicitly imposes restrictions that generate a positive Slutsky effect. This paper shows that the Hausman method imposes no other restrictions than alternative methods do and that the MaCurdy critique is unfounded.