Repeated electoral competition over nonlinear income tax schedules

We consider a repeated electoral competition game between two parties, each representing a constituent with a given income level. Parties are unable to commit to a policy before the election; they choose a nonlinear income tax schedule once elected. In each period, citizens cast a vote either for the incumbent or for the challenger. We first show that there exist (pure strategy) subgame perfect equilibria where both parties choose the most-preferred tax schedule of their constituent, subject to the constraint that they are reelected. We characterize a specific class of these BPR (Best Policy with Reelection) equilibria in which one of the parties plays its constituent’s unconstrained optimal tax function. Equilibrium tax schedules are always piecewise linear. Depending on the income levels of the two parties’ constituents, we obtain either classical left-vs-right equilibria (where the poor vote for one party and the rich for the other one) or ends-against-the-middle equilibria (where both poor and rich vote for one party while the middle class votes for the other party). In both types of equilibria, both parties propose the same tax schedule to a subset of the population.     

Mental accounting of income tax and value added tax among self-employed business owners

Mental accounting describes a series of cognitive operations that help organize financial activities and facilitate money management. Self-employed taxpayers who make use of a separate mental account for future income tax payments or collected value added tax (VAT) might find it easier to declare their taxes correctly than taxpayers who do not. This study used a questionnaire to investigate whether self-employed taxpayers (N = 350) use mental accounting to manage their income tax and VAT obligations, whether mental accounting relates to tax knowledge, business and personality characteristics, and to what extent mental accounting is related to intended tax behavior. Our results reveal that some taxpayers mentally segregate taxes from turnover (segregators) while others do not (integrators). We found small differences in mental accounting between income taxes and VAT. Moreover, confirmatory factor analyses suggested that tax knowledge and mental accounting are distinct constructs. Segregation of taxes was related to lower impulsivity and more positive attitudes toward taxation. Individuals who stated they segregate taxes due from turnover more often claimed to run financially prosperous businesses. Mental accounting was not related to intentions of evading taxes, but individuals with higher mental accounting scores reported more pronounced levels of tax planning. While our research design does not allow drawing causal inferences, these findings could suggest that increasing self-employed taxpayers’ ability to organize their financial activities might be a promising strategy to strengthen the competitiveness of their businesses.     

Foster care and the earned income tax credit

Foster care is a source of significant costs to both governments and foster children. Policies that provide income support to households potentially reduce entry into foster care via reducing child maltreatment and improving child behavior. As part of the American Recovery and Reinvestment Act in 2009 (ARRA2009), the federal government expanded the earned income tax credit (EITC), which is an important income support program for low-income working households. Using state-level data, we investigate the impact of this EITC expansion on state-level foster care entry rates. Typically, states with state-level EITC match federal EITC spending at a specific rate, meaning that increases in federal EITC spending increase state-level spending as well. We find that expansion of EITC decreased foster care entry rates by 7.43% per year in states with a state-level EITC, relative to those without. In models that separately examine foster care entry rates by age of the child, we find that the ARRA2009 had different effects on foster care entry based on the child’s age. We find that ARRA2009 decreased foster care entry rates for children age 11–15 by nearly 12% in states with a state EITC and it decreased foster care entry rates for children age 16–20 by roughly 17% in states with a state EITC, relative to states without a state EITC.     

The political viability of a negative income tax

This paper offers three propositions relating to the political viability of the negative income tax. One, despite its work disincentive, a majority of households would support a linear income tax that makes cash payments to low income households. However two, when government consumption is sufficiently high, a majority would favor a proportional tax over such a tax. Three, under certain conditions, a majority of households will prefer public provision of a private good or an in-kind transfer to a negative income tax. These latter two propositions offer an explanation for the public's apparent distaste for widespread cash transfers. Received: 17 September 1999/Accepted: 21 April 2000     

Work performance and tax compliance in flat and progressive tax systems

Different tax systems, and their impact on work motivation and tax compliance are significant issues in contemporary political and economic debates. The proportional feature of a flat tax system is assumed to lead to higher performance, while the fairness of the redistributive progressive tax system is assumed to result in higher tax compliance. However, empirical findings on the topic are inconclusive. Both work performance and tax compliance under different tax systems were examined in an experiment, with special attention devoted to the effect of a change in tax systems. A flat tax system was supposed to induce greater work performance, whereas a progressive tax system was expected to increase tax compliance based on fairness perceptions, allowing for the opposite effect due to higher complexity. Furthermore, it was assumed that performance and tax payments would be influenced by motives of self-interest. The design included 20 rounds with a real-effort task in each round, determining participants’ experimental income. Participants (N = 191) made decisions about their tax payments from round-to-round in four different experimental conditions: (1) a flat tax system, (2) a progressive tax system, (3) starting with a flat and changing to a progressive, and (4) starting with a progressive and changing to a flat tax system. Results indicate higher work performance in a progressive system. However, a change from a progressive tax system to a flat system led to increased tax compliance.     

The effects of income source,context, and income level on tax compliance decisions in a dynamic experiment

This study employs a laboratory experiment to explore the joint effect of income source (earned versus endowed) and decision context (tax versus nontax) on tax compliance behavior. During the experiment, subjects faced various income levels and made multiple reporting decisions. The results indicate that overall compliance is not significantly affected by the interaction of income source and context. However, this joint effect influences the relationship between income level and compliance and how compliance behavior evolves over time. In both cases, the treatment group with earned income in a tax context displays behavior that is distinct from the other three groups.     

Welfare rankings of income distributions: A rôle for the variance and some insights for tax reform

When generalized Lorenz curves cross, it is not possible to rank the underlying income distributions by the unanimous preference of all additively separable symmetric inequality-averse social welfare functions. But in many cases, unanimous preference results in terms of inequality-aversion are nevertheless available. When generalized Lorenz curves cross once, variance is decisive in determining a robust welfare ranking, and can provide a rationale for choosing equity over efficiency where these two desiderata conflict. Welfare recommendations for certain types of income tax reform are implied, including cases of yield-increasing redistribution.This paper has benefitted considerably from the perceptive comments of an anonymous referee. Valentino Dardanoni gratefully acknowledges financial assistance from the Banco di Sicilia and the Ente Luigi Einaudi of Rome.     

Optimal nonlinear income tax and nonlinear pricing: optimality conditions and comparative static properties

Using the Mirrlees optimal income tax model, with no income effects on labour supply, this article shows that the discrete population approach provides new insights into the characterization of the optimal tax system, which complements the previous findings. The analysis is based on the “Spence-Mirrlees wedge” which corresponds, at each observed gross income level, to a ratio between the marginal tax rate of the individual for whom the bundle is designed and that of his nearest more productive neighbour if he chooses to mimic. Using this wedge, a necessary and sufficient condition for bunching to be optimal is obtained in terms of the primitives of the model, separating optima are characterized geometrically, and comparative statics properties derived, notably with respect to skill levels and individual social weights. It is then shown that the analysis extends to adverse-selection problems where participation constraints replace the tax revenue constraint.     

The impact of tax benefits on female labor supply and income distribution in Spain

Review of Economics of the Household - Tax benefits targeted to low-wage workers have become very common transfer programs that seek to meet both efficiency and equity targets. An expanding...     

The earned income tax credit and union formation: The impact of expected spouse earnings

Using the Survey of Income and Program Participation from 2001, 2004, and 2008 and federal and state variation in earned income tax credit generosity over time, I investigate how changes in expected household earned income tax credit benefits associated with marriage affect cohabitation and marriage behavior among low-income single mothers. I simulate a marriage market to predict potential spouse earnings for a sample of single mothers in order to estimate the potential losses or gains in earned income tax credit benefits upon marriage. Using multinomial logistic regressions, I then analyze how the anticipated loss in earned income tax credit benefits upon marriage affects the likelihood of marrying or cohabiting. Results suggest that the average earned income tax credit-eligible woman can expect to lose approximately US$1,300 in earned income tax credit benefits in the year following marriage, or about half of pre-marriage benefits. Single mothers who expect to lose earned income tax credit benefits upon marriage are 2.5 percentage points less likely to marry their partners and 2.5 percentage points more likely to cohabit compared to single mothers who expect no change or to gain earned income tax credit benefits upon marriage. Despite recent policy efforts to reduce the size of the marriage penalty embedded in the earned income tax credit structure, these results suggest that the earned income tax credit still creates distortions in marriage and cohabitation decisions among low-income single mothers.     

Ethical inequality measures and the redistribution of income when needs differ

The paper considers nested social welfare functions and ethical inequality measures when households may differ in needs. Several principles of transfers between different household types are introduced and systematically examined. Their implications for the form of welfare functions and inequality measures are derived. The corresponding classes are completely described.      

Fuzzy measurement of income inequality: a class of fuzzy inequality measures

The typical practice of income inequality evaluation is by using inequality indices. Yet there is no best measure of inequality as we know it, and hence, any conclusion based on an inequality index must be subject to some doubts. Some authors even argued that the concept of inequality, by its very nature, is vague, and thus, cannot be measured like an exact concept. Motivated by these considerations, this paper studies axiomatic fuzzifications of inequality measures. Consequently, a systematic method of viewing the conclusions of inequality comparisons in terms of truth value statements is developed. Furthermore, it is shown that this method (or in fact, any other fuzzy inequality measure) can be used to construct confidence intervals for the crisp conclusions of inequality indices.I wish to thank Kaushik Basu, Larry Blume, Gary Fields, Tapan Mitra, Maurice Salles, Anthony Shorrocks, Sinan Unur, the participants of the 1993 Midwest Mathematical Economics Conference held in University of Wisconsin at Madison and those of the 2nd International Meeting of the Society for Social Choice and Welfare held at University of Rochester, and two anonymous referees for insightful comments and suggestions. Janos Aczel and Karol Baron kindly provided some help about a mathematical problem I faced, I am grateful to them. Needless to mention, however, the usual disclaimer applies.     

The labor supply effects of child care costs and wages in the presence of subsidies and the earned income tax credit

This paper uses CPS and SIPP data between 1990 and 2004 to examine the effects of child care expenditures and wages on the employment of single mothers. It adds to the literature in this area by incorporating explicit controls for child care subsidies and the EITC into the estimation. Doing so provides an opportunity to examine mothers’ sensitivity to prices and wages net of policies that influence these amounts. Results suggest that lower child care expenditures, higher wages, and more generous subsidy and EITC benefits increase the likelihood of employment. Allowing the impact of child care subsidies and the EITC to vary with expenditures and wages reveals substantial heterogeneity. In particular, the largest labor supply effects of child care subsidies are generated for mothers with higher child care costs, while the largest labor supply effects of the EITC are found for mothers with lower wages.     

A self-funding reward mechanism for tax compliance

We compare in a laboratory experiment two audit-based tax compliance mechanisms that collect fines from those found non-compliant. The mechanisms differ in the way fines are redistributed to individuals who were either not audited or audited and found to be compliant. The first, as is the case in most extant tax systems, does not discriminate between the un-audited and those found compliant. The second targets the redistribution in favor of those found compliant. We find that targeting increases compliance when paying taxes generates a social return. We do not find any increase in compliance in a control treatment where individuals audited and found compliant receive symbolic rewards. We conclude that existing tax mechanisms have room for improvement by rewarding those audited and found compliant.     

Intra-household income inequality and preferences for redistribution

Review of Economics of the Household - We empirically analyze the relationship between income inequality and individual preferences for public redistribution, focusing on intra-household income...     

Socioeconomic position and health: the differential effects of education versus income on the onset versus progression of health problems

This article seeks to elucidate the relationship between socioeconomic position and health by showing how different facets of socioeconomic position (education and income) affect different stages (onset vs. progression) of health problems. The biomedical literature has generally treated socioeconomic position as a unitary construct. Likewise, the social science literature has tended to treat health as a unitary construct. To advance our understanding of the relationship between socioeconomic position and health, and ultimately to foster appropriate policies and practices to improve population health, a more nuanced approach is required--one that differentiates theoretically and empirically among dimensions of both socioeconomic position and health. Using data from the Americans' Changing Lives Study (1986 through 2001/2002), we show that education is more predictive than income of the onset of both functional limitations and chronic conditions, while income is more strongly associated than education with the progression of both.