The Theory of Taxation and Public Economics

by Louis Kaplow

Overview

The Theory of Taxation and Public Economics presents a unified conceptual framework for analyzing taxation—the first to be systematically developed in several decades. An original treatment of the subject rather than a textbook synthesis, the book contains new analysis that generates novel results, including some that overturn long-standing conventional wisdom. This fresh approach should change thinking, research, and teaching for decades to come.


Building on the work of James Mirrlees, Anthony Atkinson and Joseph Stiglitz, and subsequent researchers, and in the spirit of classics by A. C. Pigou, William Vickrey, and Richard Musgrave, this book steps back from particular lines of inquiry to consider the field as a whole, including the relationships among different fiscal instruments. Louis Kaplow puts forward a framework that makes it possible to rigorously examine both distributive and distortionary effects of particular policies despite their complex interactions with others. To do so, various reforms—ranging from commodity or estate and gift taxation to regulation and public goods provision—are combined with a distributively offsetting adjustment to the income tax. The resulting distribution-neutral reform package holds much constant while leaving in play the distinctive effects of the policy instrument under consideration. By applying this common methodology to disparate subjects, The Theory of Taxation and Public Economics produces significant cross-fertilization and yields solutions to previously intractable problems.

Product Details

ISBN-13:	9780691148212
Publisher:	Princeton University Press
Publication date:	12/05/2010
Pages:	496
Product dimensions:	6.00(w) x 9.10(h) x 1.20(d)

About the Author

Louis Kaplow is the Finn M. W. Caspersen and Household International Professor of Law and Economics at Harvard, a research associate at the National Bureau of Economic Research, and a fellow of the American Academy of Arts and Sciences. He has published widely on the theory of taxation and public economics.

Table of Contents

Preface     xvii
Introduction     1
Framework
An Integrated View     13
Completeness of Policy Specification     15
Comprehensiveness of Instruments Considered     19
Comparability of Proposals under Assessment     22
The Problem     22
Distribution-Neutral Income Tax Adjustments as a Solution     25
Applicability     29
The Social Objective     35
Motivation     35
Examples     36
Implications     37
Exposition     41
Social Welfare Functions     41
Comments on a Range of Social Welfare Functions     44
Relevance of the Choice of a Particular Social Welfare Function     48
Optimal Taxation
Optimal Income Taxation     53
Statement of the Problem     53
Results     57
Linear Income Tax     58
Two-Bracket Income Tax     63
Nonlinear Income Tax     65
Analysis     65
Qualifications     70
Simulations     74
Discussion     77
Elaboration and Extensions     80
Behavioral Response to Labor Income Taxation     80
Labor Supply Elasticity     80
Taxable Income Elasticity     82
Long-Run Elasticity     87
Problems of Implementation     90
Administration and Enforcement     90
Lack of Comprehensive Tax Base     94
Income and Ability     96
Taxation of Earning Ability     96
Income as an Indicator of Ability versus Preferences     103
Interdependent Preferences     110
Additional Considerations     116
Liquidity Constraints     116
Uncertain Labor Income     117
General Equilibrium Effects     119
Nontax Distortions     120
Income and Commodity Taxation     122
Statement of the Problem     125
Optimal Commodity Taxation     127
Distribution-Neutral Income Tax Adjustment and Labor Effort     128
Elimination of Differential Commodity Taxation     132
Other Reforms of Commodity Taxation     133
Qualifications     135
Externalities     137
Preferences Nonseparable in Labor     137
Preferences Dependent on Earning Ability     139
Preference Heterogeneity     140
Administration and Enforcement     142
Taxpayer Illusion     143
Political Economy     144
Ramsey Taxation     145
Government Expenditures
Transfer Payments     151
Integrated View     152
Characterization     152
Analysis     154
Existing System     156
Aggregate Marginal Tax Rates     156
Application: Earned Income Tax Credit     158
Administration, Eligibility, and Measurement of Need     160
Categorical Assistance     164
Optimal Categorical Assistance     164
Application to Existing Programs     167
Endogenous Categorization     169
Work Inducements     170
Rewarding Earnings     170
Rewarding Hours     171
Other Reasons to Encourage or Discourage Work     173
Cash versus In-Kind Transfers     175
Goods and Services     179
Distribution-Neutral Income Tax Adjustments     182
Special Case: Government Provision Perfect Substitute for Consumption     185
General Case: Distributive Incidence and Optimal Provision     188
Analysis     188
Examples     190
Comments      192
General Case: Distributive Incidence and Optimal Redistribution     197
Introduction     197
Analysis     198
Optimal Income Taxation and Revenue Requirements     200
Measurement of Distributive Incidence     202
Benefit Taxation     209
Extension: Government Regulation     211
Additional Aspects of Taxation
Taxation of Capital     221
Analysis     222
Taxation of Capital as Differential Commodity Taxation     222
Qualifications     225
Applications     230
Income versus Consumption Taxation     230
Wealth Taxation     235
Corporate Income Taxation     236
Extensions     239
Uncertain Capital Income     239
Capital Levies and Transitions     242
Human Capital     245
Taxation of Transfers     249
Analysis     251
Taxation of Transfers as Differential Commodity Taxation     251
Externalities Due to Transfers     253
Externality on donees     253
Externality involving tax revenue     254
Transfers' Effects on the Marginal Social Value of Redistribution      256
Transfer Motives     258
Altruism     260
Utility from Giving Per Se     261
Exchange     263
Accidental Bequests     264
Additional Considerations     266
Other Aspects of Distribution     266
Human Capital     269
Charitable Giving     270
Taxation and Social Security     275
Redistribution     276
Labor Income Tax Comparison     276
Lifetime Income     278
Intergenerational Redistribution     285
Redistribution across Family Types     289
Forced Savings     290
Myopia     291
Myopic labor supply     295
Nonmyopic labor supply     298
Samaritan's Dilemma     301
Liquidity Constraints     306
Heterogeneity     309
Relationship to Redistribution     310
Insurance     312
Taxation of Families     315
Distribution     317
Unequal Sharing     320
Economies of Scale     323
Intrafamily Transfer Motives     325
Altruism     326
Utility from sharing per se      327
Exchange     329
Children     329
Distributive Shares as a Function of Income     332
Incentives     333
Labor Effort     333
One-worker families     333
Two-worker families     337
Endogenous Family Structure     341
Marriage     341
Procreation     343
Distributive Justice and Social Welfare
Welfare     347
Welfarism     348
Definition     348
Basis for Welfarism     349
Perspectives on Welfarism     351
Two-level moral theory     352
Moral intuitions     354
Relevance of nonwelfarist principles under welfarism     357
Well-Being     359
Definition     359
Limited Information and Other Decision-Making Infirmities     360
Other-Regarding Preferences     362
Capabilities, Primary Goods, and Well-Being     367
Social Welfare Function     370
Aggregation     370
Frameworks     370
Original position     370
Social rationality     373
Concerns     375
Interpersonal comparisons of utility     375
Weight on equality     377
Membership in Society     378
National Boundaries     379
Future Generations     382
Population Size     387
Other Normative Criteria     391
Inequality, Poverty, Progressivity, Redistribution     392
Horizontal Equity     396
Sacrifice Theories     401
Benefit Principle     403
Ability to Pay     404
Definitions as Norms     405
Conclusion     407
References     417
Index     455

What People are Saying About This

Kotlikoff

Louis Kaplow's Theory of Taxation and Public Economics is a terrific text full of insight and new approaches to examining old issues in public finance. Kaplow, a brilliant economist with a great talent for exposition, looks at things from fresh angles and explains them in new ways.
— Laurence J. Kotlikoff, Boston University

Martin Feldstein

Louis Kaplow brings innovative ideas to the difficult issues of income taxation and other fiscal instruments. The clarity of his writing and the novelty of his analysis make this book a pleasure to read.
— Martin Feldstein, Harvard University

From the Publisher

"Louis Kaplow brings innovative ideas to the difficult issues of income taxation and other fiscal instruments. The clarity of his writing and the novelty of his analysis make this book a pleasure to read."—Martin Feldstein, Harvard University

"This clear and insightful examination of income taxation and its link to analyzing other government policies will be informative and valuable for students and researchers alike."—Peter Diamond, Massachusetts Institute of Technology

"This rigorous book illuminates current policy issues in government taxation and spending, exposes the logical flaws in many common arguments, and nicely clarifies the interaction between equity and efficiency in taxes and transfers. It will serve well as a text and reference for advanced students of public economics, and it will also reward a close reading by their teachers."—Joel Slemrod, University of Michigan

"Louis Kaplow's Theory of Taxation and Public Economics is a terrific text full of insight and new approaches to examining old issues in public finance. Kaplow, a brilliant economist with a great talent for exposition, looks at things from fresh angles and explains them in new ways."—Laurence J. Kotlikoff, Boston University

Joel Slemrod

This rigorous book illuminates current policy issues in government taxation and spending, exposes the logical flaws in many common arguments, and nicely clarifies the interaction between equity and efficiency in taxes and transfers. It will serve well as a text and reference for advanced students of public economics, and it will also reward a close reading by their teachers.
— Joel Slemrod, University of Michigan

Peter Diamond

This clear and insightful examination of income taxation and its link to analyzing other government policies will be informative and valuable for students and researchers alike.
— Peter Diamond, "Massachusetts Institute of Technology"

Editorial Reviews

"This is a very ambitious project which has the quality of proposing a unified view of all these topics. Moreover, on the various aspects of taxation, the reader will find an interesting critical survey and a valuable source of information about the literature and the pending questions."—-Marc Fleurbaey, Social Choice and Welfare

From the Publisher

This is a very ambitious project which has the quality of proposing a unified view of all these topics. Moreover, on the various aspects of taxation, the reader will find an interesting critical survey and a valuable source of information about the literature and the pending questions.
— Marc Fleurbaey

Social Choice and Welfare

This is a very ambitious project which has the quality of proposing a unified view of all these topics. Moreover, on the various aspects of taxation, the reader will find an interesting critical survey and a valuable source of information about the literature and the pending questions.

Social Choice and Welfare - Marc Fleurbaey