3 the abilitytopay principle of taxation3量能課稅原則

1、2. The Ability-to-Pay Principle of Taxation2.1 First Best Taxation2.1.1. The Indicator of Ability-to-Pay: Income or Expenditure (Consumption)?2.1.2 The Equal Sacrifice Principles of Taxation2.2 Second Best Taxation 2.2.1 Deadweight Loss of Taxation 2.2.2 Optimum Commodity Taxation 2.2.3 Optimum Inco

2、me Taxation (Asymmetric Information) 2.3 Literature 2. The Ability-to-Pay Principle of TaxationWriters like Adam Smith and John Stuart Mill declined the benefit principle of taxation. While the benefit principle was for Smith only an adjunct for the ability-to-pay principle, Mill Principles of Polit

3、ical Economy considered the benefit principle of taxation to lead to regressive taxation as the poor are more in need of protection than the rich. According to Mill, this would be the reverse of the true idea of justice.However, the main reason to turn to the ability-to-pay principle of taxation is

4、the non-applicability of the exclusion principle for public goods. As public goods carry welfare for the society, they should be supplied. And as contributions to secure their supply cannot be collected, some other principle of financing had to be found. Moreover, the benefit principle cannot apply

5、to the distribution and stabilization departments of the public budget. The basic consensus found was that agents should contribute to the financing of public goods according to their ability to pay. The ability-to-pay principle requires, first, rules of equitable treatment of taxpayers, and, second

6、, an appropriate indicator of the ability to pay. Jean Baptiste Colbert,Louis XIVs Finance Minister2.1 First Best TaxationFirst best taxation means that the tax authorities dispose of comprehensive information on the precise characteristics of the taxpayers and are able to enforce the tax code.Hence

7、, the tax authorities can establish the optimum tax rgime and are not restricted by informational constraints from achieving this aim. We will first investigate the appropriate indicator of ability to pay and we will thereafter discuss the equal-sacrifice principles of taxation. Equitable Treatment

8、of TaxpayersThe two principles of equitable taxation are:Horizontal equity: Equal taxpayers should pay equal taxes.Vertical equity: Unequal taxpayers should pay unequal taxes.These formulations are not very revealing. To put more flesh on them, we have to resort to more specific instruments to make

9、them applicable. Resorting to the adoption of a cardinal and interpersonally comparable individual utility function, Martin Feldstein On the Theory of Tax Reform, Journal of Public Economics 1976 translated these principles of equitable taxation into:Feldsteins Horizontal Equity Principle: Two peopl

10、e with the same utility before taxation must have the same utility after taxation.Feldsteins Vertical Equity Principle No-Reversals Principle: If person i has greater utility than person j before taxation, then person i must have greater utility than person j after taxation. 2.1.1. The Indicator of

11、Ability-to-Pay: Income or Expenditure (Consumption)?Basically two indicators of a subjects ability to pay have been proposed:The comprehensive income CI following Schanz, Haig, and Simons: According to this concept, income is defined as accretion to wealth, equal to consumption plus increase in net

12、wealth during the period. Increase in net wealth is measured by comparing net wealth valued at market prices for the beginning and the end of the period. All assets, including cash, debt claims, equity, and real property, are included, and all liabilities are deducted. Also Vickrey, Neumark,and the

13、Canadian Carter-Commission Ottawa 1966 pleaded for comprehensive income as an indicator of ability to pay. The Meade Report, The US Blueprints for Basic Tax Reform, the Radcliffe Report, and the German Tax Reform Commission pleaded not accurately, but in the direction of comprehensive income as an i

14、ndicator of ability to pay. 2. Expenditure or consumption E/C as an indicator of ability to pay. Expenditure as an indicator of ability to pay was proposed by Hobbes (1651), Revans, Mill, Pfeiffer, Marshall, Edgeworth, Pigou, Beale, Mills, Fisher, Einaudi, Schumpeter, Kaldor, Morgenthau, Lodin, Mead

15、e, and others for references, see Seidl (1990). There are several methods to compute consumption as a tax base see Seidl 1990 :Methods to compute consumption as a tax base: The direct method which requires the taxpayer to give a direct account of all items consumed during the taxation period. This m

16、ethod would work only when all cash is replaced by plastic money and all consumption is centrally recorded.The cash-flow method which computes period consumption as period income less net savings including changes in cash and bank accounts. This method was proposed by I. Fisher (1937). Unrealized ca

17、pital gains are not considered.The wealth-accrual method which computes period expenditure as period income less period accrual of the taxpayers net wealth. Unrealized capital gains are considered as saving and are deducted. The tax-prepayment method which taxes expenditure and saving from current l

18、abor income alike, but exempts all returns on capital and all unsaving (for whatever purposes they are used). This method should facilitate assessment of a consumption tax. The taxing-business-cash-flows-cum-wages method which taxes wages and business cash flows computed as business returns less inv

19、estment and wages. From Y-I=C follows (Y-I-L)+L=C which are the two components to be taxed. This method corresponds principally to the American Hall-Rabushka flat tax. Epistemology of the two Indicators of the Ability to PayCI is an indicator of potential disposal of purchasing power, E/C is an indi

20、cator of effectuated disposal of purchasing power.CI is an indicator of created products, E/C is an indicator of used products.CI is an indicator of the sources of products, E/C is an indicator of the destination of products.CI is an indicator of what is put into the economy, E/C is an indicator of

21、what is taken out of the economy.CI is an indicator of potential satisfaction of needs, E/C is an indictor of the effectuated satisfaction of needs.Equivalence Between a Tax on Wage Income and an E/C TaxConsider a life-time budget constraint of a taxpayer. Then a proportional income tax on the wages

22、 plus all inheritances is equivalent to a proportional tax on consumption plus bequests whenIn other words, a proportional income tax which exempts interest income from taxation is equivalent in its effect on the lifetime budget constraint to a proportional consumption and bequest tax. Exemption of

23、interest income was Mills main point to avoid double taxation of incomes. Equivalence Between a Tax on Interest Income and a Wealth TaxIn the absence of taxation, wealth in period (t+1) is wealth in period t plus saving or minus dissaving plus inheritances received. The subjects wealth after period

24、T (death) is his or her bequest B: Now, a tax on wealth W is equivalent to a reduced growth rate of wealth because interest income is taxed. This means that wealth grows with a smaller growth rate. The ratio of this smaller growth rate to the growth rate without taxation is now tantamount to a tax o

25、n wealth and bequest when it satisfies the following condition in case of a wealth tax, growth of wealth continues at the rate (1+r) but wealth is reduced by the wealth tax W in each period: Does an E/C Tax Cause Higher Savings than a Revenue Neutral CI Tax?ww(1+r)w1+r(1-)PPQP denotes the bundle of

26、present and future consumption before the change in the rate of interest. The switch from P to Q denotes the income effect and the switch from Q to P denotes the substitution effect. Which effect is stronger for present consumption depends on the subjects preferences which are expressed by the elast

27、icity of substitution and the wealth elasticity of consumption.present consumptionfuture consumptionww(1+r)(1- i)w1+r(1-i)PPQpresent consumptionfuture consumption(1-i)w(1-c)w(1-c)w(1+r)QBecause of taxation of interest income, a CI tax has a broader base than an E/C tax, which allows a lower rate of

28、i in comparison to c. Which tax effectuates a higher saving depends on the preferences of a subject: If the preferences are high for present consumption steep indifference curves, the subject profits from the lower rate of the CI tax and has higher present and future consumption than under an E/C ta

29、x; moreover, saving is less under a CI tax situation Q and Q. If the preferences are high for future consumption flat indifference curves, this requires high saving. Then, a CI tax cuts in lifetime income more than an E/C tax situation P and P and saving can be higher than under an E/C tax. The Case

30、 Against an E/C TaxConsumer durables provide major problems for an E/C tax because, although they are bought in a certain period, they are not wholly consumed in this very period. Several methods can be applied:Tax averaging: durables are also taxed in the period of acquisition but tax averaging la

31、Vickrey is applied mainly to smooth the effects of tax progression.Depreciation method: spread the amount expended on consumer durables over the period of their use requires bookkeeping.User charges: for expensive durables, e.g. houses, antiques, jewelry, user charges may be applied.Method of regist

32、ered and unregistered assets: the acquisition of unregistered assets is not tax-deductible; registered assets are treated according to one of the two preceding methods. Taxation Economics: Short Account of First LectureMultiple theory of the budget: allocation, distribution, and stabilization depart

33、mentPrivate and public goods: optimality conditions and revelation of preferencesPrinciples of taxation: benefit principle and ability-to-pay approach and their areas of applicationFirst-best taxation: indicator of ability-to-pay: comprehensive income versus consumptionMethods to compute consumption

34、Equivalences between CI and E/C taxDoes an E/C tax cause higher savings than a revenue-neutral CI tax?The case against an E/C tax: consumer durablesProblems of international taxation: Taxpayers may have incentives to save in an E/C tax country and then retire in a CI tax country. This saves them a l

35、ot of taxes. Two methods were proposed to deal with these problems both carrying with them different international distribution effects and both harboring scores of loopholes for tax avoidance and tax evasion:Income tax adjustment method: an emigrant from an E/C tax country can take all wealth with

36、him or her but has to pay income tax upon entering the new CI tax country of residence. When emigrating from a CI tax country, the person is reimbursed for all income tax previously paid on his or her wealth.Expenditure tax adjustment method: an emigrant from an E/C tax country can take his wealth w

37、ith him or her only after he has paid E/C tax on it. An immigrant to a E/C tax country coming from an CI tax country is reimbursed his future E/C tax at the moment of entry because the accumulation of wealth in his former home country had been burdened by a CI tax.Other Problems of an E/C TaxGifts,

38、bequests, and exchanges provide problems of adequate treatment and can be sources of major tax loopholes.Interest payments: interest payments on consumer loans should not be deductible.Insurance, social security contributions, lotteries, necessitous expenditures: problems with fire or burglary insur

39、ance, health insurance, investment in human capital, necessitous expenditures.Regime transition: All wealth should receive a reimbursement for the income tax paid for its creation. As this is too expensive, one must provide for two asset registers and two registers for durable goods. Resum: the Achi

40、lles heel of an E/C tax are its major administrative problems, its problems with consumer durables, its problems with international taxation, and its problems with tax rgime transition. Hence, we will concentrate in the following on a CI tax. 2.1.2 The Equal Sacrifice Principles of TaxationHence we

41、have to come to grips with equal sacrifice caused by taxation. The common view since the mid-19th century is that it should imply an equal loss in utility due to taxation. Several shapes have been proposed.Money amount after absolute loss of K utility unitsMoney amount after relative loss of fractio

42、n k of utility Equal Sacrifice PrinciplesyyU(y)U(y)y1y2y2y1T2T1T1T2Equal absolute sacrificeEqual relative sacrificeGraphical illustration.Note that the equal-sacrifice principles presuppose even more than interpersonal comparability of utility; they require also cardinal utility functions. As the as

43、sumption of interpersonal comparability of utility cannot sensibly be defended, the utility function is considered as a social norm, viz. the utility function of a “representative” member of society. This avoids interpersonal comparisons of utility: subjects are being treated as if they were all ali

44、ke.Taxation Economics: Short Account of Second LectureProblems of E/C tax in international taxationOther problems of an E/C tax in particular: reimbursement of old income tax in case of tax transitionProblems of transition from a turnover tax to a value added taxEqual-sacrifice principles: equal abs

45、olute, relative and marginal sacrificeInterrelationships between equal absolute and equal relative sacrificeUtility functions: cardinal, ordinal; interpersonal comparabilityScales ratio, interval, ordinal and uniqueness of resultsSocial Welfare Functions: paternalistic versus welfaristic or: Bergson

46、 versus SamuelsonLocal measures of tax progression Economic interpretation of elasticities Recall that, once a utility function of income is given, a tax schedule can be computed from:for equal absolute sacrifice, and from:for equal proportional sacrifice.However, there is a problem which utility fu

47、nction of income is suitable for purposes of taxation.For instance, there is the Leyden approach of establishing a utility function of income. The Leyden School maintains that the utility of income has the shape of a distribution function of a lognormal distribution (taken as a deterministic functio

48、n). The theory behind this hypothesis is remarkably deficient see van Praag (1968) and the critique by Seidl (1994), so that it is largely measurement without thory. However, its empirical fit is quite good.A remarkable theory was put forward by Luce (1959) in a paper on the psychophysical laws. He

49、combined independent and dependent continuums for three types of scale: ratio scale, interval scale, and ordinal scale, and ended thus up with nine cases. We single out one special case: when the independent continuum is a ratio scale to neutralize inflation, and the dependent continuum is an interv

50、al scale, and if dimensional constants are absent, then a psychophysical function can only be one of the two forms:Assuming a ratio scale for money incomes and an interval scale for utility seems to be tailor-made for utility functions. An axiomatic approach was suggested by Young (JET 1988). He sta

51、rted with four axioms:(i) Consistency: A tax rgime which is equitable for a group of subjects should be equitable for each subset of subjects. In other words, the tax of each subject should only depend on his or her own taxable income.(ii) Strict Monotonicity: Everyones taxes increase when the total

52、 tax burden increases.(iii) Composition Principle: The method used to raise a given amount of tax revenue must also be used to raise any increment in tax revenue.(iv) Strict Order Preservation: This amounts to Feldsteins principles of horizontal and vertical equity.Theorem (Young 1): A tax schedule

53、satisfies strict monotonicity, strict order preservation, consistency, and composition, if and only if it is an equal sacrifice method.The proof of this theorem extends over four pages and is omitted here.Theorem (Young 2): A tax schedule satisfies the conditions of the preceding theorem plus scale

54、invariance if and only if it equalized absolute sacrifice relative to the utility function (unique up to a linear transformation):For the first utility function, the tax schedule is a proportional tax, for the second utility function, it is:Corollary: For the equal proportional sacrifice principle,

55、the two utility functions are:The proof results simply from applying an exponential function to a linear transform of the utility functions of Theorem (Young 2). The tax schedules resulting from these utility functions and equal proportional sacrifice are the same.Cassel (1901) suggested the tax sch

56、edule:where y and 01. The parameter amounts to a “tax exemption”. 2.2 Second Best Taxation DISTORTIVE TAXES: The second-best theory of taxation explores the effects of distorting taxes on social welfare. A distorting tax is one that prevents at least one of the first-best Pareto-optimal conditions e

57、quality between the marginal rates of substitution and the marginal rates of transformation from holding. Distorting taxes confront agents in the same market with different prices in an otherwise perfectly competitive economy.The theory of distorting taxation addresses three main questions:Welfare l

58、oss relative to the first-best optimum Hotelling (1938), Harberger (1964).Optimality: what pattern of distorting taxes minimizes the loss in social welfare for any given amount of tax revenue? Ramsey (1927), Diamond and Mirrlees (1971).Tax Reform: holding tax revenue constant, what is the change in

59、social welfare from substitutions of one tax rgime for another one? Asymmetric Information: another reason for second-best taxation When the tax authorities do not dispose of full information of taxpayers characteristics, they can maximize social welfare only under the restriction of some informatio

60、nal constraints. Hence we have to solve an exercise of second best taxation.The constraints are of the type of self-selection constraints, that is, a taxpayer will pretend to be of a different type than (s)he is, when this benefits him or her in taxation e.g., IQ incentives work only if tax is decre