Optimal Commodity Taxation

1
Optimal Commodity Taxation

• Ramseys rule
• Corlett-Hague rule
• Equity considerations

2
Optimal Income Taxation

• Edgeworth MU of income should be equal
• Problem Not a fixed amount of income (Edgeworth
  ignored incentive effects)

3
Labor supply

• Upward sloping
• Inelastic
• Backwardsloping

4
Income and substitution effects

• Slutsky equation
• Sub. Effect
• Change in leisure due to the change in relative
  price, holding utility constant
• Wage increase gt leisure get relatively more
  expensive gt demand for leisure goes down

5
Income and substitution effects

• Income effect
• Change in leisure due to the change in real
  income. Real income goes up gt demand for all
  normal goods goes up (inkl. leisure) gt demand
  more leisure

6
Compensated labor supply curve

• Substitution effect only demand curve
• Even if tax does not change labor supply, will it
  give rise to a DWL if there is a substitution
  effect.

7
Empirical estimates of compensated labor supply
elast.

• Vary between male and female
• Vary between countries

8
How does taxes affect labor supply?

• When does a tax cut decrease unemployment?
• Cut taxes in industries where labor demand is
  elastic.
• Labor supply tend to be more elastic for low
  skilled labor
• Selective tax cuts!

9
How does taxes affect labor supply?

• Unfortunately, in these industries (low skilled
  labor) a tax cut is more likely to lead to upward
  pressure on the wage rate and hence little
  effect on labor supply.

10
Tax Wedge

• Tax wedge
• The total tax on a series of transactions.

11
Taxes on Capital Income

• Why do we save?
• Intertemporal issues
• Bequest
• Precausionary reasons

12
Govt Budget Constraint

• The govt can raise money in 3 ways
• Taxes
• Charge for goods and services
• Issuing debt
• Does it matter how the govt raise money?

13
Ricardian Equivalence Theorem

• Altering the timing of taxation has no effect on
  the consumers consumption.
• Tax today consumers reduce savings to pay the
  tax
• Pay tax tomorrow consumers increase savings by
  buying bonds

14
Crucial Assumptions

• Non-distortionary taxation
• Perfect capital markets
• Full insurance
• No fiscal illusion
• Infinite lives

15
Long-run effects of Taxation

• The Laffer curve
• Is there a max? If so, where is the max??
• Taxes and growth is there a relationship???
• Solow
• Endogenous growth theory

16
Taxes and Globalization

• Tax Harmonization or Tax Competition?
• Tax on immobile factors
• Property
• Poor people
• Food

17
Conclusion Taxation

• Very hard to find taxes that meet all the
  desirable features of a tax system
• Efficiency
• Equity
• Simplicity