Entrepreneurial labor and capital taxation
TL;DR: In this article, the authors considered a Ramsey model of linear taxation for an economy with capital and two kinds of labor and showed that the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive.
Abstract: This paper considers a Ramsey model of linear taxation for an economy with capital and two kinds of labor. If the government cannot distinguish between the return from capital and the return from entrepreneurial labor, then there will be positive capital income taxation, even in the long run. This happens because the only way to tax entrepreneurial labor is by also taxing capital. Furthermore, under fairly general conditions, the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive. Thus, even though both income taxes are positive, imposing uniform income taxation would lead to additional distortions in the economy.
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TL;DR: In this article, the authors present the case for tax progressivity based on recent results in optimal tax theory, and discuss the academic research on these topics and when and how the results can be used for policy recommendations.
Abstract: This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is relevant for policy only if (a) it is based on economic mechanisms that are empirically relevant and first order to the problem, (b) it is reasonably robust to changes in the modeling assumptions, (c) the policy prescription is implementable (i.e., is socially acceptable and is not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the Mirrlees model and the zero capital income tax rate results of Chamley-Judd and Atkinson-Stiglitz are not policy relevant in our view.
449 citations
TL;DR: In this paper, the authors explore the path from basic research results in optimal tax theory to formulating policy recommendations, and show how a social welfare objective combines with constraints arising from theory to derive specifi c limits on resources and behavioral responses to taxation in order to derive optimal tax progressivity.
Abstract: The fair distribution of the tax burden has long been a central issue in policyhe fair distribution of the tax burden has long been a central issue in policymaking. A large academic literature has developed models of optimal tax making. A large academic literature has developed models of optimal tax theory to cast light on the problem of optimal tax progressivity. In this theory to cast light on the problem of optimal tax progressivity. In this paper, we explore the path from basic research results in optimal tax theory to paper, we explore the path from basic research results in optimal tax theory to formulating policy recommendations. formulating policy recommendations. Models in optimal tax theory typically posit that the tax system should maximize a Models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint, taking into account social welfare function subject to a government budget constraint, taking into account that individuals respond to taxes and transfers. Social welfare is larger when resources that individuals respond to taxes and transfers. Social welfare is larger when resources are more equally distributed, but redistributive taxes and transfers can negatively are more equally distributed, but redistributive taxes and transfers can negatively affect incentives to work, save, and earn income in the fi rst place. This creates the clasaffect incentives to work, save, and earn income in the fi rst place. This creates the classical trade-off between equity and effi ciency which is at the core of the optimal income sical trade-off between equity and effi ciency which is at the core of the optimal income tax problem. In general, optimal tax analyses maximize social welfare as a function of tax problem. In general, optimal tax analyses maximize social welfare as a function of individual utilities—the sum of utilities in the utilitarian case. The marginal weight for individual utilities—the sum of utilities in the utilitarian case. The marginal weight for a given person in the social welfare function measures the value of an additional dollar a given person in the social welfare function measures the value of an additional dollar of consumption expressed in terms of public funds. Such welfare weights depend on of consumption expressed in terms of public funds. Such welfare weights depend on the level of redistribution and are decreasing with income whenever society values the level of redistribution and are decreasing with income whenever society values more equality of income. Therefore, optimal income tax theory is fi rst a normative more equality of income. Therefore, optimal income tax theory is fi rst a normative theory that shows how a social welfare objective combines with constraints arising from theory that shows how a social welfare objective combines with constraints arising from limits on resources and behavioral responses to taxation in order to derive specifi c limits on resources and behavioral responses to taxation in order to derive specifi c
313 citations
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TL;DR: In this paper, the authors provide a perspective on the ideal tax system using insights from optimal-tax theory supplemented with empirical evidence, and apply these insights to actual policy questions regarding the progressiveness of the labor income tax, in-work tax credits, the design of the capital income tax and the taxation of housing and pensions.
Abstract: This paper aims to provide a perspective on the ideal tax system using insights from optimal-tax theory supplemented with empirical evidence. These insights are applied to actual policy questions regarding the progressiveness of the labor income tax, in-work tax credits, the design of the capital income tax, the taxation of housing and pensions, the role of indirect taxes, optimal environmental taxes, and corrective taxes on alcohol and tobacco.
31 citations
TL;DR: Astrauskaitė and Paškevičius as mentioned in this paper identified the impact of capital income taxation on corporate bond market development by using the Laffer curve and tax burden measurements and methods.
Abstract: Often taxation is considered as a restriction to any market development, lessening the willingness to effective actions or raising the opportunity costs. Therefore lots of investigations are dedicated to identification of optimal measures in order to satisfy the fiscal needs still encouraging market performance. The purpose of this paper is to identify the impact of capital income taxation on corporate bond market development by using the Laffer curve and tax burden measurements and methods. While theoretical investigations proposed an application of tax exempt to corporate bond transactions, empirical results stated no significant arguments for corporate bond market stagnation to taxation. key words: optimal tax rate, corporate bond, tax burden, Laffer curve. reference to this paper should be made as follows: Astrauskaitė, I.; Paškevičius, A.. 2016. Assessing the optimal taxation of the capital income: a case of corporate bond market, Journal of Security and Sustainability Issues 5(4): 519–532. DOI: http://dx.doi.org/10.9770/jssi.2016.5.4(7) JEL Classifications: G17, H21
8 citations
Cites background from "Entrepreneurial labor and capital t..."
...Fahri (2010); Reis (2011); Piketty ir Saez, (2012); figure 1....
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...The allocation of capital taxation theories in the 21st century Source: compiled by authors Capital taxation was opposed by Reis (2011)....
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...Therefore, equal labor and capital income taxation will stimulate the economy deviations (Reis, 2011)....
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...The taxation of financial instruments of asset and capital class should be differentiated according to their elasticity for demand Ramsey (1927), Mankiw (2000), Alworth and Arachi (2001), Gropp (2002), Reis (2011)....
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...pdf Reis C. (2011). ENTREPRENEURIAL LABOR AND CAPITAL TAXATION....
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TL;DR: In this article, the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale-less endogenous growth model, where the engine of growth are successful innovations.
Abstract: The objective of the paper is to study how the tax burden arising from an exogenous stream of public expenditures and transfers should be distributed between labor and capital in a scale-less endogenous growth model, where the engine of growth are successful innovations. Our laboratory is a prototypical quality ladder model with a labor/leisure choice where R&D productivity is decreasing in the size of the economy. This decreasing productivity removes scale effects, which are a controversial prediction of first-generation endogenous growth models. Our contribution is to show that even when labor supply has no effects on growth in the long run, it will still be optimal to tax capital, for reasonable parametrizations of the model. This is true even if the long-run growth rate decreases, with respect to the initial situation in which capital income is not taxed.
8 citations
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TL;DR: In this paper, the structure and time-consistency of optimal fiscal and monetary policy in an economy without capital are investigated. And the main finding is that with debt commitments of sufficiently rich maturity structure, an optimal policy, if one exists, is time-Consistent.
1,880 citations
"Entrepreneurial labor and capital t..." refers methods in this paper
...Following Lucas and Stokey (1983), we can further simplify the problem by focusing on the allocations that can implemented as a competitive equilibrium for some prices and policies....
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TL;DR: In this article, the optimal tax on capital income in general equilibrium models of the second best is analyzed and shown to be zero in the long run for a special case of additively separable utility functions and conditions that are sufficient for the local stability of the steady state.
Abstract: This paper analyzes the optimal tax on capital income in general equilibrium models of the second best. Agents have infinite lives and utility functions which are extensions from the Koopmans form. The population is heterogeneous. The important property of the models is the equality between the social and the private discount rates in the long run. I find that the optimal tax rate is zero in the long run. For a special case of additively separable utility functions, I then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state.
1,374 citations
"Entrepreneurial labor and capital t..." refers background in this paper
...In a Ramsey economy with capital and one type of labor, Chamley (1986) shows that it is optimal not to use capital taxation in the long run, so that only labor taxes are used to finance government spending....
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TL;DR: In this paper, a series of generalizations of the Chamley-Judd formulation is analyzed and it is shown that even for conservative specifications, tax rates of 10% and higher are possible under the optimal code.
Abstract: One of the best known results in modern public finance is the Chamley-Judd result showing that the optimal tax rate on capital income is zero in the long-run. In this paper, we reexamine this result by analyzing a series of generalizations of the Chamley-Judd formulation. We show that in a model with human capital, if the tax code is sufficiently rich and there are no pure profits from accumulating human capital, then all distorting taxes are zero in the long-run under the optimal plan. In this sense, income from physical capital is not special. To gain a better understanding of these two conditions, we study examples in which they are not satisfied and show that the optimal tax rate on income from physical capital does not go to zero. In those cases where the limiting tax rate is non-zero, we calculate its value for alternative specifications of the marginal welfare cost of taxation. Our results indicate that even for conservative specifications, tax rates of 10% and higher are possible under the optimal code.
370 citations
TL;DR: In this paper, the Chamley and Judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale, and for a class of widely used preferences, consumption taxes are zero in this limit as well.
313 citations
TL;DR: In this paper, the authors present the Atkinson-Stiglitz and Chamley-Judd results that capital income should not be taxed, but conclude that the required conditions are too restrictive and not robust enough for policy purposes.
Abstract: The traditional starting place for a study of tax reform is a definition of an ideal tax base, which is then adjusted in light of additional issues. After arguing briefly that this is not a good starting place, the essay reviews the optimal taxation literature inferences for tax base policy, focusing on three questions. - If there is annual non-linear (progressive) taxation of earnings, how should annual capital income be taxed - not at all, linearly (flat rate, as in the Nordic dual income tax), by relating the marginal tax rates on capital and labour incomes (as in the US), or by taxing all income the same? - If there is annual non-linear taxation of earnings, should there be a deduction for net savings? - If there is annual non-linear taxation of earnings, is it worth having a more complex tax structure, particularly age-dependent tax rates? Would greater use of age-dependent rules in capital income taxation be worthwhile? The essay presents the Atkinson-Stiglitz and Chamley-Judd results that capital income should not be taxed, but concludes that the required conditions are too restrictive and not robust enough for policy purposes. Hence there should be some role for including capital income as a part of the tax base. The essay discusses some empirical underpinnings for two key elements in the conclusion - differences in savings propensities and the shape of earnings (and uncertainty about earnings) over the lifetime. The conclusion that capital income should be taxed does not lead to the conclusion that the tax base should be total income, the sum of labour income and capital income. The chapter leans toward relating marginal tax rates on capital and labour incomes as opposed to the Nordic dual tax. Also examined are age-dependent taxes (for example different taxation of earnings for workers of different ages).
168 citations
"Entrepreneurial labor and capital t..." refers result in this paper
...This is consistent with the recommendation in Banks and Diamond (2008) in their discussion of the optimal tax base for direct taxation....
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