Optimal Taxation and Optimal Tax Systems

Abstract

Should additional revenue be raised by introducing a value-added tax, increasing income tax rates, or by enforcing the existing income tax more effectively? Should the attempt to tax income progressively be abandoned? Should the income tax be scrapped entirely, and replaced with a consumption tax? A normative theory of taxation, as a guide to action, should illuminate these and other fundamental questions of current and future tax policy.The theory of optimal taxation has, for the past two decades, been the reigning normative approach to taxation. During its reign it has generated several useful insights about the relationships between assumptions about the set of tax instruments available to the government, the structure of the economy, and the objectives of tax policy. However, I will argue in this paper that in its current state optimal tax theory is incomplete as a guide to action concerning the questions that began this paper and for other critical issues in tax policy. It is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist. The coercive nature of collecting taxes implies that the resource cost of implementing a tax system is large. Furthermore, alternative tax systems differ greatly in the resource cost of operation. Differences in the ease of administering various taxes have been and will continue to be a critical determinant of appropriate tax policy.

On income tax avoidance: the case of Germany

“…We look fIrst at estimates of total taxes lost, and then at micro details. Slemrod (1990) reports on estimates by the Internal Revenue ServiG.e (1988), according to which in 1987 noncompliance with the individual and corporation income tax cost the Treasury over 20 percent of tax liability. Our estimate of taxes lost for Germany is substantially higher, we estimate losses only on individual income tax proceeds and obtain a tax loss of 45 percent of tax liability.…”

Les coûts de conformité à la fiscalité des firmes et des individus : une recension des écrits

“…Alors qu'au cours des années soixante-dix il y avait un engouement pour la théorie de la taxation optimale (voir Sandmo, 1976), pour une présentation synthétique), on constate dans les années quatre-vingt-dix que le souci de réconcilier théorie et pratique fiscale amène les spécialistes à parler plutôt de système fiscal optimal (Slemrod, 1990;AIm, 1996). De tels systèmes s'élaborent en tenant compte non seulement des distorsions dans les comportements des agents associés à une certaine fiscalité (offre de travail, épargne), mais également des coûts administratifs (publics) et de conformité (privés) de la fiscalité.…”

Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems

“…A direct consequence of such a tax system is that it causes a kink in the firms' profit function: net profits equal gross profits if firms make a loss but only amount to a fraction of gross profits if they make a profit. While there may be many reasons why policy-makers raise nonlinear profit taxes -see Slemrod (1990), Daveri and Tabellini (2000) and Mankiw et al (2009) for reviews on optimal taxation -it is important to note that a tax-induced kink in the firms' profit function may also be of relevance for the dynamic properties of the markets involved. As is well known, the spectrum of possible behaviors of nonlinear dynamical systems clearly exceeds that of linear dynamical systems.…”