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Session Overview
D04: Tax Theory
Thursday, 19/Aug/2021:
10:45am - 12:15pm

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10:45am - 11:07am

A Proposal of Lifetime Income Taxation

Motohiro Sato

Hitotsubashi University, Japan

The spread of the Covid-19 has revealed the deficiencies of existing safety nets. Alongside with redistribution so as to reduce income gap, the role of income tax as insurance has become important than ever. This paper proposes to introduce a similar mechanism into personal income tax. To be concrete, the taxation on current year's income will be changed to the lifetime income taxation.

Sato-A Proposal of Lifetime Income Taxation-232.pdf

11:07am - 11:30am

The Costs Of Taxation In The Presence Of Inequality

Katinka Holtsmark, Bjart Holtsmark, Asmund Sunde Valseth

University of Oslo, Norway

This paper proposes an adjustment to the traditional theoretical definition of the marginal cost of public funds (MCF). The adjusted definition more precisely accounts for the distributional aspects of taxation than the standard MCF used in the current literature. Using the adjusted definition results in a higher MCF than using the standard definition in all allocations with income inequality. Moreover, due to its regressive distributional consequences, we show that the MCF of a uniform lump-sum tax is always greater than one when not combined with distortive taxes. With an optimal combination of a uniform lump-sum tax and a linear income tax, the MCF can also be greater than one. These findings are in contrast to the previous literature on the MCF using the standar definition which does not fully capture the distributional effects of taxation.

Holtsmark-The Costs Of Taxation In The Presence Of Inequality-417.pdf

11:30am - 11:52am

Optimal Taxation with Multiple Incomes and Types

Kevin Spiritus1, Lehmann Etienne2, Sander Renes1, Floris Zoutman3

1Erasmus University Rotterdam, The Netherlands; 2CRED (TEPP), Université Panthéon-Assas Paris II, France; 3NHH Norwegian School of Economics, Norway

We derive an optimal nonlinear income tax formula in the case where taxpayers have several incomes and can differ along multiple unobservable dimensions. We show that the tax perturbation approach of Golosov et al. (2014) and the mechanism design approach of Mirrlees (1976) lead to the same optimal tax formula. We decompose the design of the optimal tax system in two steps: which taxpayers are assigned to the same tax liability (design of isotax curves) and which tax liability is assigned to each isotax curve. The solution to the second step is characterized by an ABC formula as Diamond (1998) and Saez (2001), where welfare weights and behavioral elasticities are averaged among all taxpayers located on the same isotax curves. Applying our model to the optimal household tax problem, our numerical results display isotax curves that are almost linear and parallel, except close to the boundaries of the income domain.

Spiritus-Optimal Taxation with Multiple Incomes and Types-295.pdf

11:52am - 12:15pm

Inequality As An Externality: Consequences For Tax Design

Morten Nyborg Støstad1, Frank Cowell2

1Paris School of Economics; 2London School of Economics

This paper proposes to treat income inequality as an economic externality in order to introduce the societal effects of inequality into welfarist models. We introduce such effects in a simple and generalizable welfarist framework and show that they can have sizeable optimal policy consequences that cannot be captured by standard risk aversion or social welfare weights. Novel policy implications are illustrated through the classical optimal non-linear income taxation model, where the social planner must face a trade-off between collecting revenue and changing income inequality levels. Resulting policy consequences are disproportionately located at the top, where optimal marginal tax rates are strongly and robustly dependent on the magnitude of the inequality externality. We use several real-world examples to show that tax policy previously unsupported by optimal taxation theory can be explained in our framework. The findings indicate that the magnitude of the inequality externality could be considered a crucial economic variable.

Støstad-Inequality As An Externality-268.pdf

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