Temptation and Taxation with Elastic Labor

The Welfare Effects of Switching from Consumption Taxation to Inflation Taxation in Iran’s Economy

The net effects of switching from consumption taxation to inflation taxation on resource allocation and welfare crucially depend on production externalities. With elastic labor supply, raising inflation taxation decreases leisure, but increases the levels of real consumption, capital, and output. Moreover, this tax switch has two opposing effects on the level of real money balances: A positive ...

Temptation and Taxation by per Krusell,

We study optimal taxation when consumers have temptation and self-control problems. Embedding the class of preferences developed by Gul and Pesendorfer into a standard macroeconomic setting, we first prove, in a two-period model, that the optimal policy is to subsidize savings when consumers are tempted by “excessive” impatience. The savings subsidy improves welfare because it makes succumbing ...

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Why is the Public Sector More Labor - Intensive ?

Taking into account that within the government sector all tax payments cancel out, a public enterprise in an economy with distortionary wage taxation will be more labor intensive than a private firm. However, an unequal tax treatment of public and private sectors distorts away the economy from production efficiency. In a general equilibrium model, incurring this inefficiency is worthwhile from ...

A Distortionary Tax Argument

Why Is the Public Sector More Labor-Intensive? A Distortionary Tax Argument Government-run entities are often more labor-intensive than private companies, even with identical production technologies. This need not imply slack in the public sector, but may be a rational response to its wage tax advantage over private firms. A tax-favored treatment of public production precludes production effici...