Vidar Christiansen

WHICH COMMODITY TAXES SHOULD SUPPLEMENT THE INCOME TAX

The analysis takes as its point of departure a continuum of consumers economy in which an optimum income tax exists and is the only tax instrument in operation. The welfare effects of introducing small excise taxes to supplement the income tax are then explored. Essential in this context are changes in the tax distortions of work incentives. It is shown that a commodity should be taxed or subsidized depending on whether it is positively or negatively related to leisure in a sense which is precisely defined. The results are related to earlier contributions to the literature on direct versus indirect taxation. The history of debates on the proper roles of direct and indirect taxation goes back at least to the days of Gladstone, as well described by Atkinson (1977). The prevailing political opinion of the balance between the two types of taxes has varied over time. At present the swing in a number of European countries seems to be in favour of reforms towards tax systems which rely more heavily on indirect taxation and less on income taxation. In view of this long economic-political record, it is not surprising that the choice between income tax and commodity taxes has also become an important subject in tax theory. An early contribution to the understanding of this issue was Corlett and Hague (1953-54). Their main model considers a three-good economy, containing leisure and two taxed commodities. There is only one consumer (or a population of identical consumers). Labour is the only source of income. Producer prices are fixed. The government’s revenue requirement is given. The starting point of the analysis is a situation in which the two commodities are taxed at uniform rates. The question which is analyzed is then how the government can raise welfare by slightly differentiating the tax rates. The answer which is derived is that the consumer good which is the stronger substitute for labour (complement with leisure) should be taxed at

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.

Evaluation of Public Projects under Optimal Taxation

by which different weights are given to benefits obtained and costs incurred by persons who differ with respect to income level and possibly other characteristics which are assumed to bear strongly on welfare. There have, however, been conflicting views on the matter. One argument has been that the attainment of distributional ends should be the responsibility of tax policy and should not be allowed to interfere with the assessment of government projects. Hylland and Zeckhauser (1979) have recently given a valuable contribution to the theoretical clarification of this issue. They showed that under certain assumptions (in their own words): distributional objectives should affect taxes but not programme choice or design. The purpose of this paper is to analyse the same question within a more general economic setting and using a different analytical approach. The more precise purpose is to establish conditions under which the conventional cost-benefit criterion (that sums up unweighted net benefits and neglects tax distortions1) or a simple modification of it is valid in the presence of distributional objectives and second best taxation. Hylland and Zeckhauser showed that certain assumptions are sufficient to permit the use of the conventional cost-benefit criterion in the presence of optimal income taxation. This paper derives conditions which are necessary and sufficient for this criterion to be valid under the same tax system. In general it extends the analysis to the case of mixed income and commodity taxation. It also tries to give more attention to the economic content of the formal results. It should be made clear that the project considered in this analysis is of the public good type. A related strand of analysis is concerned with the social evaluation of publicly provided goods which are sold in the market at tax-distorted prices or market goods used in the public sector. The literature started by Diamond and Mirrlees (1971) has established that when optimal commodity taxes are in operation, private sector producer prices are appropriate public sector shadow prices for such goods even when distribution matters. This is an important result which could do a lot to simplify cost-benefit analyses in the public sector. The Diamond and Mirrlees paper also presented an optimality rule for the provision of public consumption in the presence of taxation (Diamond and Mirrlees, 1971, Section IX). But no attempt was made to derive conditions which would allow the use of simple cost-benefit criteria in this case. So this is the problem to which we address ourselves. We shall return to the relationship between the evaluation of public goods and that of market goods at the end of the paper. Section 2 describes the economic setting within which the cost-benefit analysis is to be

The political economy of publicly provided private goods

A large share of public funds is spent on private goods (education, health care, day care, etc.). This paper integrates two different approaches to the analysis of public provision of private goods. While normative public economics has established an efficiency case for such provision, the commonly held political economy view has been that it is an economically inefficient phenomenon generated by the political process. The present paper argues that the central mechanism studied in the normative approach is equally relevant to voting models of decisions on public provision. It is shown that under plausible information constraints economically efficient public provision of private goods will be part of politically rational decisions emerging from a median voter process or a representative democracy of political parties.

Implicit social preferences in the Norwegian system of indirect taxation

Abstract The revelation of implicit social preferences is a fresh field of econometrics. In this paper the theoretical setting is a model of optimal indirect taxation. A parametric preference function is specified, which makes it possible to separate and quantify three different effects. First, it provides a condensed quantitative measure of the degree of income inequality aversion. Second, a set of parameters evaluate external social costs induced by the consumption of certain commodities. Finally, the function allows estimation of implicit equivalent income scales. The authors consider the results as a source of information about an important part of Norwegian tax policy.

Two comments on tax evasion

Abstract A simple theoretical model of tax evasion behaviour is used to analyse whether a large fine (with small probability of detection) is a more powerful deterrent to tax evasion than a high probability of detection (with a small penalty). The effect of a higher tax rate on the amount of tax escaping the tax collector is also examined.

Topping Up or Opting Out? The Optimal Design of Public Provision Schemes

There is extensive public provision of private goods in all developed countries. The public provision scheme is often designed so that individuals can opt out but not top up (supplement) the publicly provided quantity/quality. Using an optimal income tax/public provision model, the authors derive the respective conditions under which a public provision scheme should allow or forbid supplementing. Disregarding administrative costs, a system where individuals are not allowed to top up is optimal if the demand for the publicly provided good increases in the amount of leisure available, while a scheme allowing individuals to top up is warranted if the demand decreases with the amount of leisure. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Externality-Correcting Taxes and Regulation

Much of the literature on externalities has considered taxes and direct regulation as alternative policy instruments. Both instruments may in practice be imperfect, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider cases where taxes are either imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases we characterise the optimal instrument mix, and show how changing the level of direct regulation alters the optimal externality tax.

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.

Cross-Border Shopping and the Optimum Commodity Tax in a Competitive and a Monopoly Market

Using a partial equilibrium model, optimality rules for a commodity tax are derived for an economy that is exposed to cross-border shopping. In a competitive market, the conventional inverse elasticity rule is shown to be valid with the qualification that it is the elasticity of domestic rather than total demand that matters. With a foreign monopoly, the inverse elasticity is modified by a tax-shifting effect. When the supplier is a multinational firm, price repercussions abroad should be taken into account. The implications for domestic taxation of the prices and taxes set abroad are also examined. Copyright 1994 by The editors of the Scandinavian Journal of Economics.