Showing papers on "Consumption tax published in 2001"

Simulating Fundamental Tax Reform in the United States

Abstract: This paper uses a new, large-scale, dynamic life-cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the U.S. federal income tax, including a proportional consumption tax and a flat tax. The model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems. Simulation results project significant long-run increases in output for some reforms. For other reforms, namely those that seek to insulate the poor and initial older generations from adverse welfare changes, long-run output gains are modest.

Taxes, Subsidies and Equilibrium Labour Market Outcomes

Abstract: We explore the effects of taxes and subsidies on job creation, job destruction, employment and wages in the Mortensen-Pissarides version of the search and matching equilibrium framework. Qualitative analytical results show that wage and employment subsidies increase employment, especially of low skill workers, and also increase wages. A job creation or hiring subsidy reduces unemployment duration but increases incidence with an ambiguous effect on overall employment. A firing tax has the reverse effects but the same indeterminacy. In the special case of a competitive search equilibrium, in which search externalities are internalized, there is a first best configuration. The results are: no tax on the wage, an employment subsidy that offsets the distortions on the job destruction margin induced by unemployment compensation and employment protection policy, as well as a hiring subsidy equal to the implicit tax on severance imposed by any form of employment protection. The costs of these and other policies are financed by a non-distortionary consumption tax. Computational experiments confirm this ideal also determines the direction in which marginal improvements can be made both in terms of efficiency and in terms of improving low skill worker employment and wage outcomes. wage inequality

Implicit Pension Debt, Transition Cost, Options, and Impact of China's Pension Reform: A Computable General Equilibrium A

Abstract: China's population is aging rapidly: the old-age dependency ratio will rise from 11 percent in 1999 to 25 percent in 2030 and 36 percent in 2050. Currently, three workers support one retiree; without reform, the system dependency ratio will climb to 69 percent in 2030 and 79 percent in 2050. The pension system has been in deficit, with an implicit pension debt in 2000 as high as 71 percent of GDP. The lack of an effective, sustainable pension system is a serious obstacle to Chinese economic reform. The main problems with China's pension system - the heavy pension burdens of state enterprises and the aging of the population - have deepened in recent years. Using a new computable general equilibrium model that differentiates between three types of enterprise ownership and 22 groups in the labor force, Wang, Xu, Wang, and Zhai estimate the effects of pension reform in China, comparing various options for financing the transition cost. They examine the impact that various reform options would have on the system's sustainability, on overall economic growth, and on income distribution. The results are promising. The current pay-as-you-go system, with a notional individual account, remains unchanged in the first scenario examined. Simulations show this system to be unsustainable. Expanding coverage under this system would improve financial viability in the short run but weaken it in the long run. Other scenarios assume that the transition cost will be financed by various taxes and that a new, fully funded individual account will be established in 2001. The authors compare the impact of a corporate tax, a value-added tax, a personal income tax, and a consumption tax. They estimate the annual transition cost to be about 0.6 percent of GDP between 2000 and 2010, declining to 0.3 percent by 2050. Using a personal income tax to finance the transition cost would best promote economic growth and reduce income inequality. Levying a social security tax and injecting fiscal resources to finance the transition costs would help make the reformed public pillar sustainable. To finance a benefit of 20 percent of the average wage, a contribution rate of only 10 percent-12.5 percent would be enough to balance the basic pension pillar. Gradually increasing the retirement age would further reduce the contribution rate. This paper - a product of the Economic Policy and Poverty Reduction Division, World Bank Institute - was presented at the conference Developing through Globalization: China's Opportunities and Challenges in the New Century (Shanghai, China, July 5-7, 2000). The study was funded by the Bank's Research Support Budget under the research project "Efficiency and Distribution Effects of China's Social Security Reform" (RPO 683-52). The authors may be contacted at ywang2@worldbank.org or zwang@ers.usda.gov.

The Treatment of Financial Services under a Broad-Based Consumption Tax

Abstract: This paper examines the appropriate taxation of financial services under a broad-based consumption tax. It is assured that the underlying objective of the consumption tax is to maintain undistorted prices between current and future consumption (i.e., to impose no distortion on savings decisions), and, in a model with uncertainty, between consumption in different states of the world. It is argued that, in order to achieve such neutrality, proportional financial service charges, like interest rate spreads and insurance premium loadings, should be untaxed. On the other hand, identifiable fixed fees should be taxed. This is because, under the assumption that the size of the spread used to finance financial services is fixed, the price of such services automatically increases with the introduction of the consumption tax. Levying the tax on them explicitly would then increase their relative price, and impose an unwanted distortion.

Globalization and tax competition: implications for developing countries

Abstract: This article analyses the effects of tax competition on developing countries. Since the 1980s, globalization and greater capital mobility have led many developing countries to adopt the policy of competing with one another to attract capital investment. One of the main forms taken by this competition has been the granting of tax holidays and other tax reductions to investing multinationals. This paper reviews the normative arguments for and against this type of tax competition, from a global perspective. It then examines these arguments in depth from the point of view of developing countries. The conclusion in general is that, since transnational companies would invest in developing countries even if they did not receive tax subsidies, but are able to receive them through a kind of bidding process among developing countries, it would be more advisable for the latter to agree to refrain from granting such subsidies. Lastly, consideration is given to some ways in which cooperation of this sort could be achieved, either regionally or globally (through the World Trade Organization, for example).

Public Goods, Tax Policies, and Unemployment in LDCs

Abstract: 1. Introduction Traditionally, an analytically convenient and widely used assumption in the international trade and development economics literature has been that of lump-sum distribution of direct (e.g., income) or indirect (e.g., consumption, tariff) tax revenue when various policy implications of such instruments (e.g., terms of trade or welfare effects) were to be examined. This analytical shortcut, however, hardly ever constitutes a real-world practice either in rich developed or in poorer developing economies. On the other hand, another extensive branch of economics, the public finance literature, has adopted a more realistic approach regarding the economic activity of a government. A government is viewed, among other things, as a provider of public (collective) consumption goods and/or of public inputs that enhance the productive capacity of the private sector. Being so, it can use revenues from nondistortionary (e.g., lump-sum) taxes or distortionary (e.g., consumption) taxes to finance the provision of such goods and services. Within this public finance context, a long-standing proposition states that when nondistortionary taxes are used to finance the provision of a public good, the first-best efficiency rule requires that the sum of the marginal rates of substitution (i.e., the social marginal benefit) equal the marginal rate of transformation (i.e., the social, marginal cost) (e.g., see Samuelson 1954). When distortionary taxes are used to finance the provision of the public good, Pigou (1947) argued that the social marginal cost exceeds the private marginal cost because of the induced indirect cost from raising tax revenue through distortionary taxation. Stiglitz and Dasgupta (1971), Atkinson and Stem (1974), and Wildasin (1984), among others, demonstrate that in certain cases (e.g., when the taxed and the public goods are complements in consumption), Pigou's argument fails to hold and the social cost may fall short of the private marginal cost.' Because of its more realistic appeal, this public finance approach to the use of tax revenue has been subsequently adopted by the relevant international trade and development economics literature. Recently, the efficiency rule for public good provision has been examined in the context of a small open economy by, among others, Feehan (1988) when tariff revenue finances the provision of the public good in an economy producing two traded goods and a nontraded public consumption good. Michael and Hatzipanayotou (1995) examine the same issue and derive the formulae for the optimal tax rates on traded or nontraded goods in an economy producing many traded and nontraded goods and where consumption tax revenue finances the provision of the public good. Michael and Hatzipanayotou (1997) demonstrate the failure of the first-best efficiency rule when lump-sum taxes are used to finance the provision of a public good in a small open economy in the presence of trade restrictions (i.e., a tariff or a VER). Two features in the above reviewed studies of the international trade/development economics and public finance literature motivate the present paper. First, all these studies derive the efficiency rule for public good provision in the context of a small open or closed economy with full employment. Unemployment, however, to a lesser or to a larger extent remains a structural feature of many developed or developing economies. From an analytical standpoint, the existence of such a distortion may alter both the optimal tax formulae and the efficiency rule for public good provision. Second, the above reviewed literature considers the case where a government uses a single policy instrument (e.g., lump-sum taxes, income taxes, tariffs) to finance the provision of the public good. More than often, however, governments may have at their disposal several tax instruments that they can simultaneously use in order to raise revenue for financing the provision of public consumption goods. …

Electronic Commerce and Multijurisdictional Taxation

Abstract: Electronic Commerce and Multi-Jurisdictional Taxation (2001) is the successor to the widely-acclaimed Electronic Commerce and International Taxation (1999). The new edition contains expanded and enhanced consideration of the tax treatment of electronic commerce from both an income tax and a consumption tax perspective. Not only does the new edition provide a detailed and up-to-date analysis of VAT developments regarding e-commerce, but it also explores the implications of e-commerce for the US state and local sales and use tax regime. The new edition discusses developments in Europe and the United States while enlarging its focus to include the tax treatment of e-commerce in China, India, Canada, Australia, and throughout the world. At the same time, the authors have deftly woven the latest OECD and European Community developments into the fabric of the book. There is no other book on the market today that analyzes the practical tax consequences of e-commerce with the multi-jurisdictional and multi-tax perspective of this insightful work by distinguished academics and practitioners Richard Doernberg, Luc Hinnekens, Walter Hellerstein, and Jinyan Li.

Implicit pension debt, transition cost, options, and impact of China's pension reform : a computable general equilibrium analysis

Abstract: The main problems with China's pension system--the pension burdens of state enterprises and the agency of the population--have deepened in recent years. Using a new computable general equilibrium model that differentiates between three types of enterprise ownership and 22 groups in the labor force, the authors estimate the effects of pension reform in China, comparing various options for financing the transition cost. They examine the impact that various reform options would have on the system's sustainability, on overall economic growth, and on income distribution. The results are promising. The current pay-as-you-go system, with a notional individual account, remains unchanged in the first scenario examined. Simulations show this system to be unsustainable. Expanding coverage under this system would improve financial viability in the short run but weaken it in the long run. Other scenarios assume that the transition cost will be financed by various taxes and that a new, fully funded individual account will be established in 2001. The authors compare the impact of a corporate tax, a value-added tax, a personal income tax, and a consumption tax. They estimate the annual transition cost to be about 0.6 percent of Gross Domestic Product (GDP) between 2000 and 2010, declining to 0.3 percent by 2050. Using a personal income tax to finance the transition cost would best promote economic growth and reduce income inequality. Levying a social security tax and injecting fiscal resources to finance the transition costs would help make the reformed public pillar sustainable. To finance a benefit of 20 percent of the average wage, a contribution rate of only 10 percent-12.5 percent would be enough to balance the basic pension pillar. Gradually increasing the retirement age would further reduce the contribution rate.

The International Macroeconomics of Taxation and the Case Against European Tax Harmonization

Abstract: The theory of international macroeconomics shows that domestic tax policy in a global economy affects foreign economic conditions via complex, dynamic interactions through relative prices, tax revenues, and wealth distribution. This paper proposes a tractable quantitative framework for assessing tax policies that is consistent with this theory. The significance of the international transmission channels of tax policy is evaluated in the context of a 'workhorse' two-country dynamic general equilibrium model. The model is used to assess the potential effects of the European harmonization of capital income taxes. The results show that this policy, if enacted along the lines followed in harmonizing value-added taxes, yields large capital outflows and a significant erosion of tax revenue for Continental Europe while the opposite effects benefit the United Kingdom. Welfare in the United Kingdom rises as result, while Continental Europe may incur a substantial welfare cost.

Taxation for the 21st Century: The Automated Payment Transaction (APT) Tax

Abstract: This paper examines the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction (APT) tax. In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/ payments system. The APT tax introduces progressivity through the tax base since the volume of final payments includes exchanges of titles to property and is therefore more highly skewed than the conventional income or consumption tax base. The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure. The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost. Like all taxes, the APT tax creates new distortions whose costs must be weighted against the benefits obtained by replacing the current tax system. ---Edgar L. Feige

Increasing Efficiency and Reducing Complexity in the Tax System in the United States

Abstract: There are only a few OECD Member countries with a lower tax take than the United States. Nonetheless there are a number of improvements that could help reduce the distortions that taxation creates in the economy and so boost long-run economic performance. The most noticeable gains could come from reforming the taxation of the income from capital. Savings are not always allocated to the area where they have the highest return, as there are large variations in the tax on capital income depending on the sector in which it is invested and the financing instruments that are used. In addition, taxation of capital income favours present over future consumption with a negative impact on savings and capital accumulation. In the past, a number of proposals have been made to reduce the tax burden on saving, by replacing the income tax with a consumption tax. While in many ways this would be the best approach, it is would represent a major change in a system that has evolved gradually ...

Taxes, Subsidies and Equilibrium Labor Market Outcomes

Abstract: We explore the effects of taxes and subsidies on job creation, job destruction, employment and wages in the Mortensen-Pissarides version of the search and matching equilibrium framework. Qualitative analytical results show that wage and employment subsidies increase employment, especially of low skill workers, and also increase wages. A job creation or hiring subsidy reduces unemployment duration but increases incidence with an ambiguous effect on overall employment. A firing tax has the reverse effects but the same indeterminacy. In the special case of a competitive search equilibrium, in which search externalities are internalized, there is a first best configuration. The results are: no tax on the wage, an employment subsidy that offsets the distortions on the job destruction margin induced by unemployment compensation and employment protection policy, as well as a hiring subsidy equal to the implicit tax on severance imposed by any form of employment protection. The costs of these and other policies are financed by a non-distortionary consumption tax. Computational experiments confirm this ideal also determines the direction in which marginal improvements can be made both in terms of efficiency and in terms of improving low skill worker employment and wage outcomes.

The Revenue Elasticity of Taxes in the UK

Abstract: This paper provides new estimates of the revenue elasticity of income taxes in the UK over the period 1989-2000. It shows that changes in fiscal structure, including changes to income-related deductions, substantially a.ect these elasticities. Using new analytical expressions, estimates of consumption tax revenue elasticities for VAT and the main UK excises are also obtained. Changes in consumption patterns over time are found to be important for the magnitude of these consumption tax elasticities. A particular merit of the approach used here is that elasticity estimates can be obtained from information on relatively few parameters, almost all of which are available from published sources.

Consumption Taxation and Endogenous Growth in a Model with New Generations

Abstract: This article studies the implications of consumption taxation on capital accumulation in a one-sector endogenous growth model with finite horizons. A tax on consumption, when tax revenues are lump-sum rebated to consumers, redistributes income between living generations and future, still unborn, generations, and therefore depresses aggregate consumption and raises saving, stimulating capital accumulation and economic growth. If however the resources from taxation are used for financing unproductive public spending, the effect of the consumption tax on the endogenous growth rate disappears as no intergenerational redistribution of income occurs. Finally, a consumption tax hike accompanied by a compensatory reduction of public debt increases long-run economic growth and reduces the consumption-output ratio. Our results on consumption taxation differ substantially from those obtained within the endogenous growth literature.

Frictions as a Constraint on Tax Planning

Abstract: David Schizer, Frictions as a Constraint on Tax Planning In recent years, the government has enacted a series of narrow tax reforms targeting specific planning strategies. Sometimes these reforms stop the targeted planning, but sometimes they merely prompt a new, more wasteful variation. The difference often lies in so-called frictions, which are constraints on tax planning other than the tax law, such as fees, accounting or regulatory treatment, credit risk, and the like. While frictions are important, reformers often lack key information, and legal academics should help provide it. This Article offers general observations about frictions that deter end runs. Most promising are strong “discontinuous” frictions that impose significant costs when taxpayers depart, even in subtle ways, from the transaction covered by the reform. Costs of relying on frictions are also considered, including information costs and distributional effects. Two case studies also are offered involving taxmotivated use of derivative financial securities. These reforms use essentially the same statutory language, but taxpayers have responded differently – and frictions explain this difference. The first reform, the “constructive sale” rule of Section 1259, targets use of derivatives in effect to sell an appreciated asset without paying tax. The second, the “constructive ownership” rule of Section 1260, targets use of derivatives in effect to invest in a hedge fund (or other pass-through entity) without the usual adverse tax consequences (i.e., less deferral and a higher tax rate). Theoretically, taxpayers can avoid either rule through relatively modest changes in the derivative’s economic return. This strategy is commonly used to avoid Section 1259, a reality that was understood by government and taxpayers alike when the measure was enacted. In contrast, this strategy is not commonly used to avoid Section 1260. The difference, which was not well understood by Section 1260’s drafters, is that securities dealers cannot supply the derivative that theoretically avoids the rule. For years, the tax system has wrestled with the problem of wasteful tax planning. Because the tax law often treats similar transactions differently, restructuring can significantly reduce the tax burden. Aggressive planning is pervasive not only in so-called tax shelters, which are not the focus of this Article, but also in real business deals such as sale of an asset or financing of a venture. Ambitious reforms, such as mark to market accounting or a consumption tax, could eliminate many discontinuities in the tax law and associated planning opportunities. But these steps are politically unattainable, at least for now. Instead, in recent years the government has Under mark-to-market accounting, investment returns are taxed annually based on changes in the asset’s fair market value, regardless of whether the property has been sold. See, e.g., David Shakow, Taxation Without Realization: A Proposal for Accrual Taxation, 134 U. Pa. L. Rev. 1111 (1986) (proposing broader use of mark-tomarket taxation). Under a consumption tax, investment returns generally would not be taxed. See, e.g., William D. Andrews, A Consumption-Type or Cash Flow Personal Income Tax, 87 Harv. L. Rev. 1113 (1974). Political Schizer, Frictions as a Constraint on Tax Planning Page 2 used a less satisfying strategy: narrow reforms that target specific planning strategies. In these transactional responses, as they are called here, the tax treatment of a particular transaction is modified to restore the customary result. This Article emphasizes that, in crafting transactional responses, reformers must consider constraints on tax planning other than the tax law. Even if a tax planning strategy is legally permissible, taxpayers may still abandon it as practically unworkable. Transaction costs may be too high, financial accounting or regulatory treatment may be unappealing, and the like. Borrowing from the economics literature, and specifically from Professors Scholes and Wolfson, this Article uses the term “frictions” to describe constraints on tax planning other than the tax law. An understanding of these nonlegal constraints reveals which tax planning merits an immediate legal response – and thus a commitment of administrative resources and political capital – and which planning is theoretical only. If a legal response is needed, frictions inform how broad the legal rule must be to actually stop the planning, instead of merely spawning a new

Tax Avoidance, Dividend Signaling and Shareholder Taxation in an Open Economy

Abstract: Essay 1: The first essay contains an approach to calculate the avoidance from the income tax and the consumption tax using National Accountings data. Using Swedish data from 1994, the empirical findings indicate avoidance from both these taxes. Cross-border shopping appears to be small, 656 million SEK or 0.07% of total consumption, while avoidance from the income taxation is more extensive, amounting to some 41 billion SEK or 5% of total income. These results imply that to lower the costs from tax avoidance, the income tax rate should be reduced and the general consumption tax rate should be raised. Essay 2: In this essay I investigate "the information content of dividends" by estimating a model to test for the information in dividend changes. The model considers the relationship between dividends and permanent earnings in firms. As firms may change the dividend level for several reasons, the model distinguishes between dividend changes combined with dividend smoothing and the dividend changes that may contain information about the future Permanent earnings. Estimating the model on Swedish firm data from 1979 to 1996, I find that some of the dividend changes undertaken by Swedish firms contain information about future changes in the firm earnings. This finding indicates the existence of asymmetric information about the future earnings between firm managers and investors. Despite several important differences between Sweden and USA, the information coefficient takes almost the same value in both countries, which indicates robustness. In addition, using Monte Carlo simulations I consider the problem with stepwise movements or stickiness in the dividend process. Essay 3: It is often argued that the pre-tax required rate of return on equity in a small and open economy like Sweden is internationally determined. Changes in domestic personal taxes on dividends and capital gains affect the after-tax rate of return of the domestic investors, but have no influence on the cost of capital or on the firms' financial behavior. This essay attempts to shed some empirical light on the on-going debate about the economic effects of taxing dividends and capital gains. I follow two somewhat tentative approaches and make use of Swedish and Nordic firm data. Taken together, the results indicate that the influence from personal taxation on market valuation and financial behavior is insignificant for the firms in our samples. Given that the combined findings from the approaches support the standard view that large firms in Sweden face an internationally determined rate of return requirement the second main question I consider is the impact of personal taxes on those firms that are confined to raising equity funds from domestic investors.

The Cost and Distribution of Tax Expenditure on Occupational Pensions in Ireland

Abstract: The pensions industry's argument that the favourable tax treatment of occupational pension funds amounts to tax deferment rather than tax exemption is evaluated using a net present value approach to estimate the cost of the tax foregone in taxing employee pension contributions on a consumption tax basis rather than an income tax basis. It is shown that the net present value estimate and the Revenue Commissioners cash flow estimate are in close agreement if tax rates for workers and pensioners are the same and that the Revenue Commissioners estimate is conservative if tax rates for pensioners are lower than for workers. A comparison is made of the trend in the cost of tax expenditure on occupational pensions since 1980 relative to the trend in the cost of direct expenditure on social welfare pensions and it is shown that the cost of tax expenditure has grown from around 10 per cent in 1980 to 66 per cent in 1997 and that the Exchequer support for the average participant in an occupational scheme has risen from one quarter to more than one-and-a-half times Exchequer expenditure for the average participant in the social insurance scheme. The assumption, therefore, that pensions can be provided at less cost to the Exchequer through private financial institutions is questionable given existing pension tax arrangements. The distribution of the tax incentives provided for members of occupational pension schemes is evaluated and it is shown that most of the benefits accrue to those at the top of the income distribution.

Label, and electronic charge scale with printer issuing the label

Abstract: PROBLEM TO BE SOLVED: To clearly inscribe the total amounts of payment that a customer has to pay on a label when the customer purchases merchandises. SOLUTION: The main body price of merchandise decided on the basis of merchandise weight and a preset unit price, the amount of a consumption tax calculated according to the main body price and a consumption tax rate and the total amounts of payment calculated from the main body price and the amount of a consumption tax are inscribed on the label 41 with the main body price and the amount of a consumption tax just above the inscription of the total amounts of payment.

Simplifying Federal Taxes: The Advantages of Consumption-Based Taxation

Abstract: This year’s $1.35 trillion tax cut reduced income tax rates and modestly liberalized the tax rules for retirement saving plans. However, the new tax law did not slow the progression of the tax code toward increasing levels of complexity. In fact, the law made 441 changes to the tax code and created a complicated series of phase-in periods for tax changes. Meanwhile, the congressional Joint Committee on Taxation released a 1,300-page study cataloging the excessive complexity of federal taxes but providing only limited proposals for reform.Minor simplification reforms will not be enough. The tax system is caught in a spiral of continual change and nonstop growth in rules. Since the mid-1980s there have been 7,000 federal tax code changes and a 74 percent increase in the number of pages of tax rules. Complying with federal tax requirements wastes 6 billion hours each year as families and businesses fill out tax forms, keep records, and learn tax rules.The key factor that causes rising income tax complexity is that the tax base is inherently difficult to measure. The Haig-Simons measure of income favored by many academic theorists is economically damaging and too impractical to use in the real world. As a result, policymakers have fallen back on ad hoc and inconsistent rules to define the income tax base. That intensifies complexity and creates instability as policymakers gyrate between different definitions of the tax base. In addition, the lack of a consistently defined tax base increases the use of the tax code for special-interest tax breaks, thus further adding to the system’s complexity.The complexity and inefficiency of the individual and corporate income taxes have led to great interest in replacing them with a consumption-based tax. The leading consumption-based tax proposals, including the national retail sales tax and the Hall-Rabushka flat tax, could dramatically simplify federal taxation. Those tax systems would eliminate many of the most complex aspects of federal taxation, including depreciation accounting and capital gains taxation.Imposing the largest federal tax on income was a historic mistake: no simple, efficient, and stable measure of income has been found in nine decades of the income tax. It is time to recognize this mistake and replace the income tax with a consumption-based alternative.

Consumption Tax Proposals in the International Setting

Abstract: Attention has been given to the international aspects of income taxation, allowing for both equity and efficiency concerns. Some of the recent debate over tax reform, especially in the United States, proposes to depart from the traditional combination of personal income and corporation profits tax that has dominated tax systems since World War II. The proposed shifts include (1) replacement of the personalized income tax with a value-added tax, (2) exclusion of capital income from the income-tax base leaving in effect a wage-income tax, and (3) a personalized tax on consumption. The comparative merits of these schemes as would arise in a closed economy setting have been discussed at length, but relatively little attention has been given to their consequences in an open economy setting. This article examines this aspect, including implications for both internation equity and efficiency.

Optimality, Hartwick's Rule, and Instruments of Sustainability Policy and Environmental Policy

Abstract: We consider a closed, constant-technology, capital-resource economy with resource stock amenity value, which would otherwise aim for conventionally, PV-optimal development that maximises the present value of utility using a constant discount rate. In this economy, we calculate the decentralised policy instruments needed to achieve continuously zero net investment, and hence (by Hartwick's rule) sustainability in the form of constant utility. We also calculate the environmental policy needed to internalise the resource's amenity value: its natural form is a subsidy on holding the stock. The sustainability policy comprises this stock subsidy (needed if sustainability is to be maximal, though the subsidy will be at a different level from that for environmental policy alone); and a consumption tax which ultimately falls towards a 100% subsidy. The latter gives agents the incentive needed to invest when the return on capital is less than the utility discount rate. Neither a resource flow tax nor the resource stock subsidy on its own has any power to achieve sustainability. As a preliminary, we clarify some confusion in the literature about the relationship between PV-optimality and Hartwick's Rule, using an exact solution for illustration.

Optimality, Hartwick’s Rule, and Instruments of Sustainability Policy and Environmental Policy

Abstract: We consider a closed, constant-technology, capital-resource economy with resource stock amenity value, which would otherwise aim for conventionally, PV-optimal development that maximises the present value of utility using a constant discount rate. In this economy, we calculate the decentralised policy instruments needed to achieve continuously zero net investment, and hence (by Hartwick’s rule) sustainability in the form of constant utility. We also calculate the environmental policy needed to internalise the resource’s amenity value: its natural form is a subsidy on holding the stock. The sustainability policy comprises this stock subsidy (needed if sustainability is to be maximal, though the subsidy will be at a different level from that for environmental policy alone); and a consumption tax which ultimately falls towards a 100% subsidy. The latter gives agents the incentive needed to invest when the return on capital is less than the utility discount rate. Neither a resource flow tax nor the resource stock subsidy on its own has any power to achieve sustainability. As a preliminary, we clarify some confusion in the literature about the relationship between PV-optimality and Hartwick’s Rule, using an exact solution for illustration.

Taxing Future Consumption

Abstract: The Economic Council’s Road Map for Tax Reform laid the groundwork for a greater discussion of the consumption tax principle as a basis for taxation in Canada. In his paper, Jack M. Mintz continues this discussion by setting out the case for and against a consumption tax. He argues that the tax treatment of savings is likely to become a more central policy focus for the medium term. More practically, he cites three possible evolutionary changes that could lead to a greater reliance on consumption taxes: a sharp increase in sales tax revenues (sales and excise) to reduce reliance on income taxes; a major expansion of RRSP and pension limits to allow for greater accumulation of wealth to meet future contingencies of various sorts; and the introduction of an exempt-yield tax savings plan (with restrictions on contributed amounts) that would encourage saving by individuals expecting increases in future tax rates. More fundamentally, Mintz observes that the income tax could even be replaced with an expenditure tax system with continuing reliance on the other indirect forms of consumption taxation (sales taxes). Even though Mintz believes that the adoption of a consumption tax would certainly set Canada apart from other countries, including the United States, he holds that the technical issues, including implementation and transition issues, are not insurmountable if promoting future consumption is the key to Canada’s overall development.

Consumption Taxation and Endogenous Growth in a Model with New Generations

Abstract: This article studies the implications of consumption taxation on capital accumulation in a one-sector endogenous growth model with finite horizons. A tax on consumption, when tax revenues are lump-sum rebated to consumers, redistributes income between living generations and future, still unborn, generations, and therefore depresses aggregate consumption and raises saving, stimulating capital accumulation and economic growth. If however the resources from taxation are used for financing unproductive public spending, the effect of the consumption tax on the endogenous growth rate disappears as no intergenerational redistribution of income occurs. Finally, a consumption tax hike accompanied by a compensatory reduction of public debt increases long-run economic growth and reduces the consumption-output ratio. Our results on consumption taxation differ substantially from those obtained within the endogenous growth literature.

Non-traded goods and optimal trade policy in a cash-in-advance economy

Abstract: This paper develops a standard trade model of a small open monetary economy with two traded and one non-traded goods. Money is introduced through a generalized cash-in-advance constraint where the share of goods purchases that must be made using cash, varies across sectors. We find that free trade may be harmful so that alternative policy instruments may be considered to improve welfare. In addition, we study and compare the optimal tariff formula and the optimal consumption tax structure. In the presence of a monetary distortion of the non-traded good, a consumption tax may not Pareto dominate a tariff although the latter bears an additional production burden. This corroborates the theory of second best.

Subsidy policies in a fertility choice model

Abstract: This paper compares the effects that a subsidy to health expenditure or a subsidy to child-rearing costs has in a fertility choice model in which mortality is also endogenously determined. Whichever subsidy is instituted, the population growth rate rises. While a subsidy to health expenditure reduces welfare, a subsidy to child-rearing costs might increase welfare. The welfare analysis also suggests that a subsidy to health expenditure should be financed by a capital income tax, while a subsidy to child-rearing costs should be financed by a consumption tax.

Consumption Taxes and the Theory of General and Individual Taxation

Abstract: This article offers both an economic and philosophical analysis of modern consumption tax proposals such as the Flat Tax. It demonstrates that, given firm behavior, the proposals are likely to deviate substantially from individual taxation, which can be defined as taxing individuals for the value of what they consume. Although the proposals deviate from individual taxation, the philosophical underpinnings of consumption tax theory rest on individual taxation. The article concludes that if non-consequentialist and weighted welfarists theories of consumption taxation are important, one should choose other methods of implementing a consumption tax. If the design of the modern proposals is important, however, one should acknowledge that the proposals would tax consumption solely to promote overall economic growth.

Taxing Future Consumption

Abstract: The Economic Council’s Road Map for Tax Reform laid the groundwork for a greater discussion of the consumption tax principle as a basis for taxation in Canada. In his paper, Jack M. Mintz continues this discussion by setting out the case for and against a consumption tax. He argues that the tax treatment of savings is likely to become a more central policy focus for the medium term. More practically, he cites three possible evolutionary changes that could lead to a greater reliance on consumption taxes: a sharp increase in sales tax revenues (sales and excise) to reduce reliance on income taxes; a major expansion of RRSP and pension limits to allow for greater accumulation of wealth to meet future contingencies of various sorts; and the introduction of an exempt-yield tax savings plan (with restrictions on contributed amounts) that would encourage saving by individuals expecting increases in future tax rates. More fundamentally, Mintz observes that the income tax could even be replaced with an expenditure tax system with continuing reliance on the other indirect forms of consumption taxation (sales taxes). Even though Mintz believes that the adoption of a consumption tax would certainly set Canada apart from other countries, including the United States, he holds that the technical issues, including implementation and transition issues, are not insurmountable if promoting future consumption is the key to Canada’s overall development.