The Economics of Taxation

237 Pages·2003·1.05 MB·English

by  Bernard Salanie

The Economics of
Taxation
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The Economics of
Taxation
Bernard Salanie´
The MIT Press
Cambridge, Massachusetts
London, England
Thistranslation(2003bytheMassachusettsInstituteofTechnology
OriginallypublishedinFranceunderthetitleThe´oriee´conomiquedelafiscalite´ byEco-
nomica,Paris
(2002byEconomica
All rights reserved. No part of this book may be reproduced in any form by any
electronic or mechanical means (including photocopying, recording, or information
storageandretrieval)withoutpermissioninwritingfromthepublisher.
This book was set in Palatino on 3B2 by Asco Typesetters, Hong Kong and was
printedandboundintheUnitedStatesofAmerica.
LibraryofCongressCataloging-in-PublicationData
Salanie´,Bernard.
[The´oriee´conomiquedelafiscalite´.English]
Theeconomicsoftaxation/BernardSalanie´.
p. cm.
Enl.translationof:The´oriee´conomiquedelafiscalite´.
Includesindex.
ISBN0-262-19486-4(alk.paper)
1.Taxation. I.Title.
HJ2307.S26 2002
336.2—dc21 2002035595
Contents
Foreword ix
Introduction 1
I The Effects of Taxation 13
1 Tax Incidence 15
1.1 Partial Equilibrium 16
1.1.1 The Effect of Payroll Taxes 16
1.1.2 The General Analysis of Partial Equilibrium 19
1.2 General Equilibrium 23
1.2.1 The No-Taxation Economy 23
1.2.2 Introducing Taxes 24
1.2.3 General Remarks 26
1.2.4 Infinitesimal Analysis 27
1.2.5 Final Remarks 33
2 Distortions and Welfare Losses 35
2.1 The Effects of Taxation 38
2.1.1 Labor Supply 38
2.1.2 The Effects of Taxation on Savings 45
2.1.3 Taxation and Risk-Taking 49
2.2 Welfare Losses 52
2.3 Conclusion 57
II Optimal Taxation 59
3 Indirect Taxation 63
3.1 Ramsey’s Formula 63
3.1.1 An Informal Approach 63
3.1.2 The General Model 64
vi Contents
3.1.3 Some Special Cases 69
3.2 Productive Efficiency 73
4 Direct Taxation 79
4.1 The Emergence of the Model 79
4.2 Mirrlees’s Model 83
4.2.1 The Rawlsian Case 84
4.2.2 The General Approach 87
4.2.3 The Quasi-linear Case 91
4.3 Generalizations 96
4.4 Simulations 103
5 Mixed Taxation 111
5.1 The Negative Income Tax 111
5.2 Is Indirect Taxation Useful? 113
5.3 Criticisms 117
6 The Taxation of Capital 121
6.1 Applying Classical Results 123
6.2 The Overlapping Generations Model 124
6.3 The Zero Capital Taxation Result 126
6.4 Capital Accumulation 129
6.5 Capital Taxation with an Infinite Horizon 137
6.6 The Incidence of Capital Taxation 141
6.7 Conclusion 142
7 Criticisms of Optimal Taxation 147
7.1 Horizontal Equity 149
7.2 Tax Reforms 152
7.3 Administrative and Political Issues 155
III Some Current Debates 159
8 Low-Income Support 161
8.1 Measuring Poverty 162
8.2 Private Charity and Public Transfers 163
8.3 The Main Benefits 166
8.3.1 Guaranteed Minimum Income 167
8.3.2 The Negative Income Tax 168
8.3.3 Low-Wage Subsidies 168
8.3.4 The Minimum Wage 170
Contents vii
8.4 The Lessons from Theory 171
8.4.1 The Negative Income Tax 171
8.4.2 Low-Wage Subsidies 176
8.4.3 The Guaranteed Minimum Income 179
8.4.4 The Minimum Wage 179
8.5 Empirical Evaluations 181
8.6 Recent Reforms 184
9 The Consumption Tax 187
9.1 Equivalences between Taxes 187
9.2 The Comprehensive Income Tax 188
9.3 The Consumption Tax in Practice 190
10 Environmental Taxation 193
10.1 Optimal Green Taxes 196
10.1.1 The First-Best Case 196
10.1.2 The Second-Best Case 198
10.2 Is There a Double Dividend? 200
Appendixes
A Some Basic Microeconomics 207
A.1 Consumer Theory 207
A.1.1 Hicksian and Marshallian Demands 207
A.1.2 The Slustky Equations 209
A.1.3 Interpretation 210
A.2 Producer Theory 211
A.2.1 The Producer’s Problem 211
A.2.2 Factor Demands 211
A.2.3 The Special Case of Constant Returns 213
B Optimal Control 215
Index 219
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Foreword
This book is a somewhat expanded translation of my The´orie e´cono-
mique de la fiscalite´, published by Economica in Paris. It originates
in a course taught at ENSAE and at the University of Chicago. I
have greatly benefited from the reactions of the students who went
through these courses. I thank without implicating Arnaud Buisse´,
Dominique Bureau, Paul Champsaur, Pierre-Andre´ Chiappori, Maia
David, Ste´phane Gauthier, Anne Laferre`re, Guy Laroque, Thomas
Piketty, Jean-Charles Rochet, Franc¸ois Salanie´, Jean-Luc Schneider,
AlainTrannoy,andespecially PhilippeChone´ fortheircommentson
a first version of this text. I am also grateful to Christian Gourie´roux
and six anonymous reviewers for their comments.