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This paper studies the design of education policies in a setting in which optimal redistributive labor taxation is available. It is usually argued that the crucial parameter to guide education policy is the complementarity of education and ability. This is true only when labor supply is fixed or when income taxes are not allowed. I show that, if labor supply is endogenous and if the government can tax income in a nonlinear way, the crucial parameter is how the education elasticity of wage changes with ability. Taking the elasticity criterion into account, education subsidies are optimal in cases in which, under the complementarity criterion, education taxes would be optimal. To do this, I use an asymmetric information setting that motivates nonlinear taxation of income and education. © 2007 Springer Science+Business Media, LLC.

Abstract.  We investigate the provision of public capital in an endogenous growth model with asymmetric information. In a credit market with costly screening, we show that the equilibrium contracts are characterized by the self‐selection of borrowers. Through identifying an additional adverse effect of taxation on growth, we show that the optimal tax rate in our model is smaller than the output elasticity of public capital. Therefore, our analysis justifies a more conservative tax policy in the presence of asymmetric information. Furthermore, our model suggests a number of implications that appear to be well supported by preliminary evidence in cross‐country data. JEL classification: D82, H21, O41

When different layers of government exert their taxing power upon a common base, the decisions made by one tier affect the receipts that the other policymakers can collect. Likewise, when same level authorities derive their receipts from a mobile tax base, a competition mechanism takes place that triggers externalities. This paper proposes a model where both horizontal and vertical interactions take place. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided through the choice of the instruments, in order to assess the robustness of traditional analyses results in a more general and realistic scheme. With respect to a unique government framework, an excessively high level of taxation emerges from the simultaneous interplay of horizontal and vertical tax externalities.

When different layers of government exert their taxing power upon a common base, the decisions made by one tier affect the receipts that the other policymakers can collect. Likewise, when same level authorities derive their receipts from a mobile tax base, a competition mechanism takes place that triggers externalities. This paper proposes a model where both horizontal and vertical interactions take place. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided through the choice of the instruments, in order to assess the robustness of traditional analyses results in a more general and realistic scheme. With respect to a unique government framework, an excessively high level of taxation emerges from the simultaneous interplay of horizontal and vertical tax externalities.

In this article we study the corporate tax effects on credit market equilibria. In particular, we develop a model that accounts for five pieces of evidence: i) the existence of a tax incentive to borrow, ii) the negative relationship between leverage and profitability, iii) the existence of asymmetric information in credit markets, iv) the screening activity of lenders and v) the business cycle effects on the spread between the high-yield and the investment-grade interest rates on corporate loans. Assuming the existence of two types of firms, we show that either a separating or a pooling credit market equilibrium can arise. More importantly, the equilibrium is crucially affected by corporate taxation. Given these results, we also provide a welfare analysis and discuss corporate tax policy implications.

I present a rationale for a government to discriminate between debt and equity financing when taxing corporate income. For risk-averse entrepreneurs, equity generates more surplus than debt, because it provides financing and insurance. A government seeking to extract surplus from entrepreneurs would naturally tax equity-generated income more than debt-generated income. I also establish a less obvious reason why the government might want to extract surplus from entrepreneurs. It is well understood that when the quality of projects is unobservable to investors, risk-averse entrepreneurs with higher-return projects might retain a larger share of equity to signal their type (Leland and Pyle (1977)). I show that in such an adverse selection set-ting, while competitive investors are constrained to offer actuarially fair terms, the government can use taxes to discriminate between types. This degree of freedom allows manipulation of the relevant incentive constraints so that a lower level of debt suffices for separation, and an increase in overall efficiency can be obtained. Since entrepreneurs separate along their debt-to-equity ratios, the optimal non-linear tax schedule to achieve the desired discrimination is isomorphic to one that taxes debt-generated income at a lower rate than equity-generated income.

We examine monetary and fiscal interactions in a monetary union model with uncertainty due to imperfect central bank transparency. It is first shown that monetary uncertainty discourages excessive taxation and may thus reduce average inflation and output distortions. However, as countries enter the monetary union, this tax-restraining effect of uncertainty is mitigated. The monetary union may hence lead to higher fiscal distortions in some member countries, depending on governments' spending targets and on the change in the degree of uncertainty implied by common monetary policy.

This paper analyzes enhanced cooperation agreements in corporate taxation in a three country tax competition model where countries differ in size. We characterize equilibrium tax rates and the optimal tax responses due to the formation of an enhanced cooperation agreement. Conditions for strategic complementarity or strategic substitutability of tax rates are crucial for the welfare effects of enhanced cooperation. Simulations show that enhanced cooperation is unlikely to be feasible for small countries. When enhanced cooperation is feasible, it may hamper global harmonization. Only when countries are of similar size is global harmonization a feasible outcome.

This paper studies the implications of an increase in the price of necessities, which disproportionally hurts the poor, for optimal income taxation. Our analyses show that, when the government is utilitarian and disutility from labor supply is linear, the optimal net nominal tax schedule is unchanged and the government expects households to supply more labor in order to secure their consumption expenditures. Quantitative analyses with convex disutility of labor supply reveal that, because of positive labor supply effects, keeping average tax rates constant suffices to optimally react to the asymmetric price shock. However, the poorest agents are expected to increase their labor supply the most. Thus, optimal income tax policy in response to asymmetric price changes does not prevent the disproportional decline in the indirect utility of poorer households.

When same authorities belonging to a same level of government derive their receipts froma mobile tax base, a competition mechanism takes place among them that triggers externalities.Likewise, when di§erent layers of decision-makers exert their taxing power upon a commonbase, the choices made by one tier a§ect the receipts that the other governments can collect.Generally speaking, the decisions made by one government a§ect the tax revenue that can becollected by the decisionmakers belonging to the same tier of government or by stacked jurisdic-tions : externalities arise, the existence and the magnitude of which are closely related to thenature of the tax, to the mobility of the base and to the distribution of tax competence amongdecisionmakers. This paper proposes a model where both horizontal and vertical interactionstake place. Uncertainty concerning the base, that is, the amount of capital likely to be inves-ted, is introduced and a generalization of taxation schemes is provided in order to assess therobustness of traditional analyses results in a more general and realistic scheme. The analysisshows that horizontal and vertical externalities point towards opposite directions : while hori-zontal competition leads to ine¢ ciently low rates, the common pool problem arising from thestacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. Thepaper aims at Önding out whether the combination of both externalities yields higher or lowerglobal tax rates than the one that would emerge in a unique government case. It turns that anexcessively high level of taxation emerges. Nevertheless, the vertical tax externality is lessenedwith respect to the vertical competition case : the global tax rate sets at an intermediary level sothat the outcome is brought closer to the social optimum issue.

When same authorities belonging to a same level of government derive their receipts froma mobile tax base, a competition mechanism takes place among them that triggers externalities.Likewise, when di§erent layers of decision-makers exert their taxing power upon a commonbase, the choices made by one tier a§ect the receipts that the other governments can collect.Generally speaking, the decisions made by one government a§ect the tax revenue that can becollected by the decisionmakers belonging to the same tier of government or by stacked jurisdic-tions : externalities arise, the existence and the magnitude of which are closely related to thenature of the tax, to the mobility of the base and to the distribution of tax competence amongdecisionmakers. This paper proposes a model where both horizontal and vertical interactionstake place. Uncertainty concerning the base, that is, the amount of capital likely to be inves-ted, is introduced and a generalization of taxation schemes is provided in order to assess therobustness of traditional analyses results in a more general and realistic scheme. The analysisshows that horizontal and vertical externalities point towards opposite directions : while hori-zontal competition leads to ine¢ ciently low rates, the common pool problem arising from thestacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. Thepaper aims at Önding out whether the combination of both externalities yields higher or lowerglobal tax rates than the one that would emerge in a unique government case. It turns that anexcessively high level of taxation emerges. Nevertheless, the vertical tax externality is lessenedwith respect to the vertical competition case : the global tax rate sets at an intermediary level sothat the outcome is brought closer to the social optimum issue.

China has for almost four decades been experiencing a market transition and an associated tax state transition, leading to the emergence of capitalists who increasingly control economic resources and serve as important sources of tax revenue. Some theories suggest that these changes should give capitalists political power. From the perspective of the taxation institution, using a mechanism-based case study, this article investigates whether China's emerging capitalists have gained bargaining power with the party-state. Findings suggest that hidden bargaining, patron-clientelism, legislature co-optation, and legal repression constrain their bargaining power. The underinstitutionalized taxation system has co-opted the capitalists through patronage and, more important, deterrence, thereby building an asymmetric mutual dependence between the local state and capital owners.

This contribution analyses the current arrangements for financing devolved government in Spain and explains the asymmetry between the tax powers of the historic ox foral Autonomous Communities – the Basque Country and Navarre – and the so-called 'common system' used by the rest. There were major reforms in the assignment of taxation powers in 1997 and 2002 which have led to some convergence between the two systems. This has provided the advantage of greater transparency while also levelling the playing field to prevent territorial tax competition. ; Publicado

This paper addresses the issue of capital tax competition among an arbitrary number of countries. Countries are allowed to be asymmetric not only in their population endowment but also in their capital endowment per inhabitant. National governments tax capital and labor in order to finance a public good. Asymmetric capital taxation arises at equilibrium leading to a distortion on the international capital market. We provide conditions for the existence of a Nash Equilibrium. We fully characterize how equilibrium taxes and welfare levels depend upon countries population and capital endowments.