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From Optimal Tax Theory to Tax Policy

From Optimal Tax Theory to Tax Policy: Retrospective and Prospective Views

Robin Boadway
Copyright Date: 2012
Published by: MIT Press
Pages: 304
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  • Book Info
    From Optimal Tax Theory to Tax Policy
    Book Description:

    Many things inform a country's choice of tax system, including political considerations, public opinion, bureaucratic complexities, and ideas drawn from theoretical analysis. In this book, Robin Boadway examines the role of optimal tax analysis in informing and influencing tax policy design. Scholars of public economics formulate models of optimal tax-transfer systems based on normative principles that reflect efficiency and equity considerations. They use that analysis to form views about the optimal design or reform of actual tax systems that are much more complicated than their models. Boadway argues that there is an important symbiosis between ideas drawn from normative tax analysis and tax policies actually enacted. Ideas germinated by normative analyses have led to the widespread adoption of the value-added tax, the use of refundable tax credits, and various business tax reforms. Other ideas provide rationales for existing features of tax systems, including the tax treatment of retirement savings and human capital investment. Boadway charts the evolution of optimal tax analysis and discusses the lessons it holds for tax policy. He describes the theoretical challenges posed by recent findings in such fields as behavioral economics and social choice and considers how optimal tax analysis might adapt to these new paradigms. His analysis offers a timely assessment of the role that optimal tax theory has played in establishing the principles that continue to inform tax policy.

    eISBN: 978-0-262-30168-8
    Subjects: Finance, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-Viii)
    Hans-Werner Sinn

    Every year the CES council awards a prize to an internationally renowned and innovative economist for outstanding contributions to economic research. The scholar is honored with the title “Distinguished CES Fellow” and is invited to give the “Munich Lectures in Economics.”

    The lectures are held at the Center for Economic Studies of the University of Munich. They introduce areas of recent or potential interest to a wide audience in a nontechnical way and combine theoretical depth with policy relevance....

  4. Acknowledgments
    (pp. ix-x)
  5. 1 Introduction
    (pp. 1-6)

    The choice of a tax (and transfer) system is one of the most important economic decisions governments take. In OECD countries, total tax revenues absorb in the order of half of national income. In developing countries, the proportions are somewhat smaller, but that is mainly due to the lesser importance of transfers as a source of government expenditures to be financed. The proportion of goods and services diverted by taxation from the private sector in developing economies is substantial.

    Many things inform the choice of a tax system, including politics, public opinion, bureaucratic influence, administrative complexities, information technology, and ideas...

  6. 2 From Tax Theory to Policy: An Overview
    (pp. 7-46)

    Our focus in this chapter is on the relevance of optimal tax theory for tax policy. To put this into context, it is useful to begin with a brief overview of the development of optimal tax theory, and the parallel evolution of tax systems in practice. And, to pave the way for subsequent discussion, I review some of the key challenges that optimal tax theory faces. All of these issues will be taken up in more detail in subsequent chapters.

    A characterizing feature of optimal tax theory is its second-best nature. The question it addresses is how best to raise...

  7. 3 Policy Lessons from Optimal Tax Theory
    (pp. 47-138)

    Optimal tax theory, or normative second-best policy analysis more generally, cannot give categorical policy prescriptions. By necessity, theory is based on abstract models whose construction is designed to focus on particular factors to the exclusion of others as well as being either analytically or computationally feasible. Moreover computational feasibility itself may not be sufficient if the computations cannot yield some intuition about the mechanisms at work. Instead, normative analysis provides insights into the kinds of forces that lead to desirable outcomes. Different models provide different insights, and some judgment must be exercised in using these insights for actual policy prescription....

  8. 4 Relaxing the Second-Best Constraints
    (pp. 139-184)

    The “new new welfare economics,” as Stiglitz (1987) has labeled the modern approach to normative policy analysis, emphasizes information as the main constraint facing a benevolent government that precludes it from achieving first-best outcomes. The particular way in which information constraints are imposed in optimal fiscal policy analysis is in itself somewhat demanding and unrealistic. In the standard optimal income tax analysis, as we have noted, the government is assumed to be unable to observe the one characteristic—ability or productivity—that differs among households, which seems a reasonable simplification. However, what government can observe is equally relevant. It can...

  9. 5 Challenges for Second-Best Analysis
    (pp. 185-242)

    As the preceding discussion indicates, tremendous advances have been made in second-best optimal policy analysis since the seminal contributions of Corlett and Hague (1953), Lipsey and Lancaster (1956–57), Harberger (1964, 1971), and especially Diamond and Mirrlees (1971), and Mirrlees (1971). Many of the findings from this vast literature have informed policy analysis and prescription. However, given that this theory is necessarily based on abstract models that focus on particular aspects of the policy problem, and that this theory is continuously evolving, it is inevitable that at any given point of time, shortcomings and caveats can be identified that require...

  10. References
    (pp. 243-268)
  11. Index
    (pp. 269-290)