MEASURING THE DEADWEIGHT LOSS FROM TAXATION IN A SMALL OPEN ECONOMY

Transcription

1 MEASURING THE DEADWEIGHT LOSS FROM TAXATION IN A SMALL OPEN ECONOMY A geneal mehod ih an applicaion o Seden By Pee Bich Søensen Depamen of Economics Univesiy of Copenhagen EPRU and CESifo

2 MOTIVATION The opimal ax sucue minimizes he oal deadeigh loss fom aising he necessay evenue and aaining he desied amoun of edisibuion To solve he opimal ax poblem, e need esimaes of he maginal deadeigh loss fom he diffeen ax insumens This pape offes a geneal equilibium mehod of esimaing maginal deadeigh losses in a small open economy

3 AGENDA The geneal equilibium appoach o he measuemen of deadeigh loss The heoeical geneal equilibium fameok of he pesen pape Geneal fomulae fo he maginal deadeigh loss fom he diffeen ax insumens Calibaion mehods Applicaion: The maginal deadeigh loss fom axaion in Seden

4 THE GENERAL EQUILIBRIUM APPROACH TO THE MEASUREMENT OF DEADWEIGHT LOSS Habege (1964): The oal deadeigh loss fom imposing a (uni) ax on good k is DWL Habege iangle 1 dx Tax ineacion effecs 2 k k k i k 2 dk ik dx d i k j uni ax ae on good j X j (compensaed) demand fo good j

5 MEASURING DEADWEIGHT LOSS: ALTERNATIVE APPROACHES Ignoe ax ineacion effecs (Poblem: poenially lage bias) Use lage scale CGE models o capue geneal equilibium effecs (Poblem: lage models end o become black boxes ) Goulde and Williams (JPE, 2003): Use analyical model ha accouns fo ineacion beeen commodiy makes and he labou make (Poblems: Ineacions ih ax bases fo capial income ignoed and he DWL fom capial axes canno be analysed)

6 APPROACH IN THE PRESENT PAPER Simple anspaen GE fameok accouning fo he ineacion beeen all he majo ax bases Allos decomposiion of he maginal deadeigh loss ino he losses semming fom adjusmen of he vaious ax bases Ne calibaion mehod accouns fo cossesicions on key elasiciies Open economy fameok allos fo he shifing of souce-based capial axes

7 THEORETICAL FRAMEWORK To-peiod life cycle model Capial pefecly mobile; labou immobile (o impefecly mobile) Tax insumens: Labou income ax Consumpion ax Residence-based capial income ax on saving Souce-based business income ax on invesmen

8 HOUSEHOLDS U U C, C, L 1 2 PC WL T PS, PC 1 1 PS B T WL B, 0 1, B Uiliy maximizaion yields he expendiue funcion 1 E E P,, W 1, U 1 1 hee P includes indiec axes

9 FIRMS Y F K, L, Y K WL, Pofi maximizaion implies: K,,, F K L F K L W L k Diec effec Indiec effec k k dl L d dk K L d,, L K L K age elasiciy of labou supply use cos elasiciy of capial demand K (business pofis elaive o labou income) WL

10 THE GOVERNMENT Pesen value of ne axes paid by a coho: c c B 2 R 1 WL 1 B k PS B K c consumpion ax ae as a facion of consume pice

11 E THE MARGINAL DEADWEIGHT LOSS FROM TAXATION expendiue funcion Maginal deadeigh loss: "Saic" "Dynamic" evenue change evenue change s d ddwl de dr de dr dr, i c, k,, i i i i i i d d d d d d Noe: In geneal e have s de dr dd d i d i WL i d dr d d i

12 THE DEGREE OF SELF-FINANCING DSF he facion of he iniial evenue gain hich is los due o behavioual esponses DSF i dr / d ddwl / d s i s i dr / d dr / d d i i

13 THE MARGINAL DEADWEIGHT LOSS FROM THE LABOUR INCOME TAX DSF loss of labou loss of consumpion loss of business income ax evenue ax evenue income ax evenue loss of savings ax evenue L c L 1 k k L s S m L S m k k compensaed ne age elasiciy of labou supply compensaed ne age elasiciy of saving k maginal effecive ax ae on business income K s PS / WL, WL 1 1

14 THE MARGINAL DEADWEIGHT LOSS FROM THE GENERAL CONSUMPTION TAX DSF c 1 ddwl / d s 1 b1 pb2 dr / d B1 B2 1 b1, b2, p WL WL 1 1

15 THE MARGINAL DEADWEIGHT LOSS FROM THE BUSINESS INCOME TAX DSF k loss of labou income ax evenue loss of consumpion ax evenue loss of business income ax evenue 1 m k K k L L c L s S loss of savings ax evenue m k K ddwl / d s 1 dr / d

16 THE MARGINAL DEADWEIGHT LOSS FROM THE SAVINGS INCOME TAX DSF loss of labou loss of consumpion loss of business income ax evenue ax evenue income ax evenue 1 c L L k k L m S s s s loss of savings ax evenue L S s compensaed ne inees elasiciy of labou supply compensaed ne inees elasiciy of saving pps WL pesen value of capial income pesen value of labou income

17 CALIBRATION METHODS: ELASTICITIES Using he Slusky equaions and he budge consains, e deive he links beeen faco supply elasiciies implied by he life cycle model. Fo example: 1 S L c 2, 1 g b2 1 b C 1 c 1 1 g C L 1 L 1 1 c, c p1 g c We also deive he link beeen he compensaed and he uncompensaed inees elasiciies of saving. The paamee is calibaed fom a muli-peiod heoeical life cycle model. s

18 CALIBRATION METHODS: EFFECTIVE TAX RATES The effecive oveall ax ae on consumpion is esimaed fom VAT and excise ax aes, using disaggegaed consumpion daa and assuming consumes opimise he allocaion of consumpion The effecive oveall ax ae on saving is esimaed fom ax aes on diffeen foms of saving, assuming consumes opimise hei pofolio composiion The effecive maginal ax ae on business income is esimaed by he King-Fulleon mehod as a eighed aveage of he ax aes on deb-financed and equiy-financed invesmen The effecive maginal ax ae on labou income includes social secuiy axes and is a eighed aveage acoss income goups

19 CALIBRATION TO SWEDISH DATA, 2008 Elasiciies of Elasiciies Iniial effecive Income and Ohe faco supply of ax and consumpion paamees and demand subsiuion ansfe aes shaes ec. (annual basis) L L S S ˆ 0.0 S / h 1 c k m o / 1/ 3 b s k P C H S F H / PC 0.2 I / S g c g b 0.09 T n 45 K

20 DEGREES OF SELF-FINANCING: BASELINE SCENARIOS Cu in effecive maginal ax ae on Conibuion o DSF fom highe evenue fom axes on Labou income Consumpion Business income Savings income Toal DSF Labou income Consumpion Business income Savings income

21 SENSITIVITY ANALYSIS: TOTAL DEGREES OF SELF-FINANCING (%) Change in effecive maginal ax ae on Base line 1 1 / 0.2 L ( 0.17) 1 / 0.5 L ( 0.36) S ˆ 0.3 S ( 0.26) S ˆ 0.3 S ( 0.86) g c c g s s ( =0.098) ( =0.191) Labou income Consumpion Business income Savings income

22 CONCLUSIONS In a high-ax couny like Seden, he deadeigh loss fom an acoss-he-boad incease in he maginal labou income ax ae could be aound 1/3, and he deadeigh loss fom an incease in he maginal savings ax ae could be moe han ½ Robus esul: DWL(invesmen ax on nomal eun) > DWL(labou ax) > DWL(consumpion ax): Case fo an ACE Ignoing ax ineacion effecs hen analysing he deadeigh loss fom diec and indiec axes on labou does no lead o majo eos, bu ignoing such effecs hen analysing axes on capial leads o seious undeesimaion of he DWL The DWL fom he savings income ax appeas o be quie high, so hee may be a good case fo he Nodic dual income ax ih a lo capial income ax ae