Journal of economic perspectives volume 4, number i winter 1990 pages 157178 optimal taxation and optimal tax systems joel slemrod optimal tax formulas are either guides to action or nothing at all. Optimal taxation in theory and practice 060109 final. One way to strive for fairness in a tax system is to treat equals equally. I am not a development economist, having worked on tax issues only in mexico, colombia, and. Principles of an optimal tax system a good or optimum tax system can be defined as a system which helps to achieve maximum possible number of canons of taxation. To demonstrate how allowing for heterogeneous agents and nonindividualized. From optimal tax theory to applied tax policy bas jacobs erasmus university rotterdam, tinbergen institute and cesifo december 6, 2012 abstract this paper aims to provide a perspective on the ideal tax system using insights from. This paper argues that, in its current state, optimal tax theory is incomplete as a guide to action concerning many critical issues in tax policy. Nov 19, 2008 although optimal tax theory dominates both tax economics and tax law scholarship in the upper academic ranks, legal academics make remarkably little use of it in their daytoday work. Suppose that the government needs to raise a given amount of revenue to nance public programs and that it cares about social welfare. The marginal cost of public funds is one at the optimal tax.
The two dimensions of tax fairness good tax policy should promote fairness. Quizlet flashcards, activities and games help you improve your grades. A theory of optimal tax systems has the promise of addressing some of the fundamental issues of tax policy in a more satisfactory way than the theory of optimal taxation. Optimal marginal tax rates increase in income in our baseline calibration to the united states, and the optimal tax schedule can be well approximated by a simple two parameter function. Optimal taxation theory and principles of fairness woodrow wilson. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general. H20,h21,h23,h24,h53 abstract a notable feature and principal virtue of tax by design is its systemwide perspective on different.
Optimal taxation and optimal tax systems joel slemrod. This session provides autonomous local governments require that they generate adequate ownsource revenues to provide the level and quality of services demanded by residents and businesses. Models in optimal tax theory typically posit that the tax system should. Optimal taxation is a set of normative prescriptions for tax policy usually based on maximizing social welfare for a given revenue requirement. They provide many different types of local public goods and services and are able to tailor the amount and quality of these goods to the preferences of their. In dm world, second best optimal tax system maintains production efficiency while distorting consumer side of market to raise revenue. This paper explores the interplay between tax theory and tax policy.
Four principles of optimal tax system design by theodore p. International discourses on what makes an effective tax system have tended to be dominated by perspectives from the united states and europe. The theory of optimal taxation has, for the pas two decades, been the reigning normative approach of taxation. In particular, the standard optimal taxation methodology often ignores the equity and efficiency effects that arise because taxes must be collected, at some cost. Three cornerstones of the theory of optimal taxation common structure a typical exercise in optimal taxation has three key aspects.
Optimal taxation and optimal tax systems by joel slemrod. Sanjit dhami ali alnowaihi march 2006 abstract the neglect of administrative issues is a serious limitation of optimal tax theory, with implications for its practical applicability. Request pdf an optimal tax system a notable feature and principal virtue of tax by design is its systemwide perspective on different elements of the tax system. A notable feature and principal virtue of tax by design is its system wide perspective on different elements of the tax system.
On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. A good tax system is designed on the basis of an appropriate set of rules the system should strike a balance between the interests of the tax payer and the tax authorities. For example, given a linear expenditure system, uniform taxation is optimal regardless of the systems parameters. Principles of an optimal tax policy, by fred foldvary, ph. There is a tax base that is still overly complex and inconsistent with basic tax principles for efficiency and growth.
Aas lewis distinguished professor of business emeritus senior economist center for business and economic research marshall university west virginia legislative joint select committee on tax reform may 4, 2015. Published in volume 4, issue 1, pages 157178 of journal of economic perspectives, winter 1990, abstract. But unless you know them, you cannot argue they are second. In other words two taxpayers with equal ability to pay should pay the same amount of tax. Frank hahn 1973 hould additional revenue be raised by introducing a valueadded tax, increas. Optimal environmental taxation in the presence of other. We finally derive a parsimonious characterization of optimal taxes. Several alternative tax regimes will be presented, including a rationalized. Public economics the theory of optimal taxation has, for the pas two decades, been the reigning normative approach of taxation. Optimal marginal tax rate schedules depend on the distribution of ability. H21 abstract this paper develops a realistic, tractable theoretical model that can be used to investigate socially optimal. For instance, keynesian ideas were dominant after the second world war. A theory of optimal capital taxation thomas piketty and emmanuel saez nber working paper no.
In particular, the standard optimal,taxation,methodology,often ignores the equity and efficiency effects that arise because,taxes must,be collected, at some cost. Gregory mankiw, matthew weinzierl, and danny yagan t he optimal design of a tax system is a topic that has long fascinated economic theorists and. An optimal tax system should help to achieve the objectives of maintaining economic stability, equalization of distribution of income and increase rate of economic growth. The standard theory of optimal taxation posits that a tax system should be chosen to. Within commodity taxes, how should tax rates vary across commodities.
The paper then proceeds to look at the optimisation of particular aspects of the tax system. Optimal taxation in theory and practice harvard university. Optimal taxation study guide by benuel includes 44 questions covering vocabulary, terms and more. Using the url or doi link below will ensure access to this page indefinitely. Joel slemrod in his paper optimal taxation and optimal tax system, argues that optimal tax theory, as it stood when slemrod wrote this paper, was an insufficient guide to determine tax policies because policy makers had yet to find a way to implement a tax system that enticed individuals to work at their optimal level.
Optimal taxation theory studies how to design tax systems that maximize social welfare. Abstract a notable feature and principal virtue of tax by design is its systemwide perspective on different elements of the tax system. Many economists and policy makers argue that reform of the corporate income tax system is needed, although a variety of rationales on why and how have been offered. H21 abstract this paper develops a realistic, tractable theoretical model that can be used to investigate sociallyoptimal. H20,h21,h23,h24,h53 abstract a notable feature and principal virtue of tax by design is its system wide perspective on different. For example, given a linear expenditure system, uniform taxation is optimal regardless of the system s parameters. Developing economy christopher heady and pradeep mitra. Building values depend on inspection and disclosure. The literature on optimal taxation typically treats the social planner as a utilitarian. Should the government use income or commodity taxes. Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that maximises a social welfare function subject to economic constraints. My recent paper with mick keen, entitled optimal tax administration, formalizes the normative theory of tax administration, allowing one to formally pose key tax policy questions. Changing theoretical perspectives on tax systems in the west. In that case, the difference between the optimal rates on dirty and clean consumption equals the pigovian tax divided by the mcpf.
If the marginal cost of public funds is one at the optimal tax system, the marginal excess burden of a distortionary tax is exactly compensated by its marginal redistributional bene. Fiscal federalism and optimal income taxes maximiliano dvorkin introduction in federal countries, such as the united states, state and local governments play an import ant role. This perspective on tax fairness, known as horizontal equity, is quite intuitive. Optimal taxation theory attempts to derive the system of taxation that will achieve the desired. Yet there is surprisingly little analysis of the general problem of optimal piecewise linear income taxation. Pdf a renewed interest in the theory of optimal taxation has. This paper,argues,that previous,attempts,to derive an optimal tax system are largely irrelevant to. Each couple consists of a primary earner who always participates in the labor market, but makes an hoursofwork choice, and. Abstract a notable feature and principal virtue of tax by design is its system wide perspective on different elements of the tax system. Optimal taxation and optimal tax systems american economic.
The social welfare function used is typically a function of individuals utilities, most commonly some form of utilitarian function, so the tax system is chosen to maximise the aggregate of individual utilities. In its current state, optimal tax theory is incomplete as a guide to action for critical issues in tax policy. Abstract a central issue in public economics,is the appropriate,design of a tax system. The optimal tax systems perspective is shown to shed light on the choice of tax instruments, the problem of tax evasion, and the appropriate tax treatment of capital income. In particular, we can explore whether and when the optimal tax system exhibits lumpsum transfers or a nonmonotone e. An optimal tax system louis kaplow nber working paper no. The second welfare theorem tells us that any pareto e cient allocation can be achieved through lumpsum taxation. A tax system should be fair, and it should seek to raise the maximum revenue with the minimum cost. Section iii deals with income taxation and section iv with commodity. What shapes the optimal degree of progressivity of the tax and transfer system. Introduction the most intractable problem in tax design has long been the conflict between equity and efficiency. Optimal environmental taxation in the presence of other taxes. Optimal taxation and optimal tax systems joel slemrod the.
A philosophical objection to the optimal tax model linda sugin i. Thus, estimation done within that framework is pointless. But if the social planner is allowed to be unconstrained in choosing a tax system, then the problem of optimal taxation becomes too easy. Optimal tax mix on efficiency grounds, the optimal tax mix requires simply a lumpsum income tax, and commodity taxes are not used. There are two main papers in the theoretical literature on the continuumoftypes case, by sheshinski 1989. Principles of a good tax system west virginia senate. The standard theory of optimal taxation posits that a tax system should be chosen to maximize a social welfare function subject to a set of constraints.
Common structure a typical exercise in optimal taxation has three key aspects. The marginal cost of public funds is one at the optimal. There are two main papers in the theoretical literature on the continuumoftypes case, by sheshinski 1989 and slemrod et al. With the right kind of data, preferences can be represented by a flexible enough functional form so that measurements are not merely. A notable feature and principal virtue of tax by design is its systemwide. We show that the shape of the optimal schedule is sensitive to the amount of scal pressure the government faces to raise.
A notable feature and principal virtue of tax by design is its system. Optimal tax theory, focused on the efficiency of tax systems came to play a much more influential role, when perspectives in development shifted towards marketedoriented. After all, if the economy is described by a representative consumer, that consumer is going to pay the entire tax bill of the government in one form or another. Argues that previous attempts to derive an optimal tax system are largely irrelevant to practical tax design, because they typically ignore a range of considerations reflecting fiscal and societal institutions that are essential elements in the normative and positive analysis of taxation. Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a. Take a look at actual tax system sometimes you are an optimal tax theorist and dont know the actual top tax rates its weird. The principles of a good tax system point to land value taxation as optimal. A regressive tax means that higher income households pay less in taxes. Congressional research service 1 he corporate income tax system has been a focus of many recent debates about tax reform and the economy. The optimal tax approach the standard approach to optimal taxation is based on several methodological assumptions. Several features of the new tax system as with the old system remain less than optimal. Tax systems in developing countries joel slemrod notes for the keynote lecture at the inaugural conference of the zurich center for economic development, 12122016 why have me deliver the keynote at a taxation in developing countries dc conference.
Nonlinear tax incidence and optimal taxation in general. The optimal tax systems perspective is shown to shed light on the choice of tax. Static optimal taxation how should government set taxes. Three cornerstones of the theory of optimal taxation. On equity grounds, both income and commodity taxes should be used in general. Philosophical objection to the optimal tax model, a.
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