Uri M. Possen

Tax evasion and occupational choice

This paper is concerned with the combined effect of tax compliance and tax audit policy on the occupational choice of individuals and on public policy objectives such as tax revenue, total production, and social welfare. Individuals are assumed to have a choice between riskless work and a risky entrepreneurial occupation. They are only differentiated according to their attitudes towards risk. More risk averse individuals go into the safe occupation and less risk averse people become entrepreneurs. Tax evasion is only accessible to the latter and therefore its control tends to discourage risk taking. Whether control of tax evasion is desirable for the economy as a whole depends on the objective function of the government. It is shown that tax audit policy has conflicting effects on tax revenue, per capita income, and social welfare. These conflicts are illustrated through a numerical example. In this paper, the emphasis is placed on the clarity and the simplicity of the presentation so as to argue that, even though the tax schedule can hardly be differentiated across individuals, tax evasion and its control can be used by policymakers to introduce variability in the individuals tax treatment.

A MODEL OF WEALTH DISTRIBUTION

The paper presents a model of wealth distribution that makes use of Gibrats law of proportionate effect to explain the way wealth is distributed and how the distribution changes over time. The stochastic factor in each period is shown to be the result of deliberate choices by individual decision makers regarding their savings, investment, and bequests, given their inherited wealth and natural ability. The source of randomness is two-fold: uncertainty about the rates of return and randomness of the distribution of natural skills. Also studied is the impact of government tax parameters on the inequality of wealth. Two categories of taxes are distinguished: taxes on flows, such as those on income, portfolio returns, and earnings, and those on the stock, such as wealth or estate taxes.

The value of explicit randomization in the tax code

Abstract Consider individuals who draw income from the same random distribution but who differ in their risk aversion and who decide whether or not to report their income truthfully. The government chooses the tax structure including a random tax option, audit probabilities, and penalties on detected evaders to maximize expected ex post social welfare. High income individuals who do not evade then choose to pay either a given amount or draw from a random tax schedule. This schedule ensures that everyone complies with more risk averse individuals choosing the deterministic schedule and less risk averse ones choosing the random tax option.

Optimal growth and distribution policies

Abstract The paper studies the impact of various policy instruments in a two-class Ramsey style model of optimal growth. It examines how conventional results must be modified when one considers the effect of policy instruments (taxes, government borrowing, and public investment) on the distribution of income and on factor supplies. The main conckusion is that without the availability of the ideal lump-sum tax, the (modified) golden rule is unlikely to be the optimal policy.

An Equilibrium Analysis of Fiscal Policy with Uncertainty and Incomplete Markets

Insurance aspects of tax policies are studied in a simple intertemporal general equilibrium model in which agents are uncertain about both the future wage rates and the rate of return on capital. Taxation and lump-sum subsidy policies generally reduce employment, output, and the capital stock but, nonetheless, they can be structured to provide Pareto improvements on the incomplete market equilibrium. These policies provide insurance against individual shocks, not aggregate shocks. Examples of welfare maximizing tax schemes are provided using a simple computable general equilibrium model. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Wage and Price Controls in a Dynamic Macro Model

Wage and price controls in the form of inflation ceilings are introduced into a dynamic extension of a variant of the IS-LM model. The controls do not alter the location of the equilibrium; rather, they affect the path and speed of adjustment of the economy. When slack exists, controls can be useful for lowering the rate of inflation and increasing employment and aggregate demand. However, when excess demand is present, controls although reducing the excess demand pressures and lowering the inflation rate may necessitate some form of commodity rationing. AN ISSUE THAT has recently received a great deal of attention is the effectiveness of wage and price controls as a macroeconomic policy tool. This paper studies the question in order to determine whether the view that controls are useful has a theoretical basis. Controls as introduced here are considered a means by which the government can affect the path of adjustment of the economy towards the equilibrium, and not an instrument by which the government can alter the location of the equilibrium itself. It is argued that if the economy faces cost-push type of inflation, where the actual inflation rate is above the equilibrium inflation rate, and the economy is adjusting to the equilibrium at a pace considered too slow, the institution of controls can result not only in a fairly rapid reduction in the rate of inflation but also some increase in employment. On the other hand, if the economy faces demand-pull inflation controls can prevent the economy from moving to an undesirable equilibrium and in the process reduce excess demand pressures although not eliminate them. As indicated above, for a macro model to be suitable for studying this problem, it is necessary both that it allow for inflation and that it be dynamic, in the sense of yielding information about not only equilibrium values but also the adjustment path of the economy. The formulation utilized adds to a variant of the IS-LM model a Phillips curve, a government balance equation, and an equation to indicate how inflationary expectations adjust. These additions make the IS-LM model dynamic and also incorporate wage and price inflation into that framework. This paper follows the tradition of Lipsey [1] in assuming that the Phillips curve is a labor market equation that relates the actual rate of wage inflation to the employment rate (or unemployment rate) and the expected rate of inflation. The government balance equation insures that government outflows equal government inflows. For example, when government expenditures exceed tax collections, the government must increase the size of its outstanding nominal debt to make up the difference. Finally, it is assumed that the expected rate of price inflation adapts towards the actual rate.

Retirement as a hedge

This paper explores the effect of letting individuals choose their retirement age in a world of uncertainty where there exist both defined benefit (DB) and de?ned contribution (DC) pension plans. The paper shows that giving individuals the flexibility to determine when to retire is an important tool for them when they are hedging against future uncertainty. It also finds that it is preferable to let people make their retirement decision after rather than before the uncertainty is lifted. Finally, it shows that shifting from DB to DC plans fosters the rate of activity of elderly workers.

Fiscal policy with multilevel governments

Abstract This paper analyzes the impact on federal fiscal policy of local government reactions in the short run. The various governments produce public goods using private sector inputs. Many of the results depend on complementarity or substitutability between public and private goods and the relative efficiency of the governments. However, even when the local governments are as efficient as the federal government in production, an exact switch of activities from federal to local governments is not neutral since the different levels of government have different transactions needs.

Fiscal policy and the term structure of interest rates

Abstract This paper examines the impact of fiscal policy in a non-monetary, one-factor, multi-period, neoclassical model with uncertainty. It shows that a countercyclical change in fiscal policy tends to reduce the instability in the economy and, in so doing, lowers the premium of long-term over short-term interest rates (the term structure premium) when the policy goes into effect at the time of the initial shock. If the policy does not go into effect until the period after the initial shock has occured, however, it will tend to raise the term structure premium.

Some Aggregate Effects of Heterogeneity in Information Processing

This paper analyzes the equilibrium of an economy where economic agents differ with respect to their information gathering and processing abilities. Our results depend on the magnitude of the relative risk aversion. We show that the unsophisticated (with respect to their information processing abilities) agents are disproportionately important in the cases of both large and small risk aversion. In the case of the relative risk aversion measure being greater than unity volatility of aggregate consumption is reduced. This supports the view that observed consumption in many countries fluctuates less than predicted by models with fully rational agents only. Copyright 1997 by Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research