Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments considers a targeted one percentage point reduct...

We set up an OLG-model, where households choose human capital investment and decide on investing their endogenous savings in a portfolio of riskless and risky assets. Thereby, the households are exposed to both aggregate wage and capital risks due to technological shocks. We derive the optimal public policy mix of taxation and education policy and show that risks can be optimally diversified on...

This paper studies the aggregate and distributional implications of Markov-perfect tax-spending policy in a neoclassical growth model with capitalists and workers. Focusing on the long run, our main …ndings are: (i) it is optimal for a benevolent government, which cares equally about its citizens, to tax capital heavily and to subsidise labour; (ii) a Pareto improving means to reduce ine¢ cient...

Educational risk and wage uncertainty are important features in human capital investment. Therefore, we apply an OLG-model, wherein human capital formation is exposed to idiosyncratic risk. Extending the instruments available for social insurance, a (Norwegian-type) two-bracket progressive labor tax system and education subsidies are shown to enhance the efficiency-insurance trade-off and to in...

This paper shows that a small open economy, which suffers from involuntary unemployment, should levy a positive source-based tax on capital income. A revenue-neutral tax reform, which increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax reform will lower marginal cost of production, increase output, reduce unemployment, an...

This paper studies the e ects of agent heterogeneity on optimal capital income tax rates. In a two period model with arbitrarily many heterogeneous agents, we explicitly derive the welfare e ects of taxation depending on the distribution of the agents' characteristics. In particular, we show that the sign of the optimal capital income tax rate depends not on the extent of inequality in goods en...

A dividend imputation tax system provides shareholders with a tax credit that can be used to offset personal tax on dividend income. The size of this credit depends on tax paid at the corporate level so that the “double taxation” of dividends is effectively eliminated. This paper shows how to infer the value of imputation tax credits (which is an important input into the weighted-average cost o...

This paper considers education investment and public education policy in closed and open economies with an extortionary government. The extortionary government in a closed economy chooses an education policy in order to overcome a hold-up problem of time-consistent taxation similar to benevolent governments. The two types of government differ in their education policies if highly productive lab...

This paper proposes a new scheme of personal income taxation that would eliminate inefficiencies arising from differences in the tax treatment of investments in intangible human capital and other types of capital formation. It also would offset the exacerbation of those distortions due to progressive income taxation, without requiring the latter’s abandonment. The tax regime proposed here would...