The present study investigates the framing effect of tax–transfer systems on work effort decisions. We devised two theoretically equivalent treatments—the redistributive tax treatment and the redistributive transfer treatment—and studied subjects’ work effort choices in a novel public goods experiment. We found that subjects chose higher effort levels when redistribution took place via transfers than via taxes. Interestingly, the treatment effect was more pronounced among those with lower cognitive abilities and those who judged the tax–transfer system to be unfair. The results have the potential to offer insight on the debate about the extent to which taxes or transfers should be actively used for redistribution.

Motivated by distributional concerns raised by recent breakthroughs in AI and robotics, we ask how workers would prefer to manage an episode of automation in a task-based model, which distinguishes between automation and traditional technical progress. We show that under majority voting with the option to implement a “partial” UBI (as transfers to workers) it is optimal to tax capital at a higher rate than labor in the long run to fund the partial UBI. We show that, unlike traditional technical progress, automation always lowers the labor share in the long run, justifying distributional concerns. A quantitative analysis of an episode of automation for the US economy shows that it is optimal from the workers’ perspective to lower capital taxes and transfers over the transition. Nevertheless, this policy increases worker welfare by only 0.7% in consumption-equivalent terms, compared with a 21.6% welfare gain to entrepreneurs, because the welfare gains to workers from lower capital taxes are second-order, while the gains to entrepreneurs are first-order.

This article argues the case for changes to the Goods and Services Tax (GST) as a key part of fundamental tax reform in Australia. A more comprehensive base would bring gains in efficiency and simplicity, with equity goals better met by the income transfer system. Revenue gains of a broader GST base and/or a higher rate could fund tax mix change packages to replace more distorting state stamp duties and fund lower income tax rates. The tax mix change packages would improve efficiency and simplicity, with no substantial changes to aggregate revenue or to equity.

Two timely reviews of Australia’s transfer and tax systems were commissioned by the incoming government in 2008, although the GST, tax exemption of superannuation payments to people aged over 60, and pre-announced personal income tax cuts were placed outside the scope of inquiry. Most of the recommendations of the Harmer Pension Review have been implemented, but most of the recommendations of the Henry Tax Review have not. The Henry recommendations provided for enhanced equity and efficiency through a broader and simplified base, concentrating revenue raising on personal and business income, private consumption, and economic rents from natural resources and land. They provide an integrated blueprint for ongoing debate over tax reform.

In path-breaking work, Weingast et al. argue that there is a positive relationship between legislature size and inefficiency in public expenditures. Their proposition is currently known as the ‘law of 1/n’ and has been widely debated in political science and public administration. However, recent studies have questioned the validity of the theory. In this letter, we conduct the first meta-analysis that assesses the generality of the ‘law of 1/n’. Based on a sample of thirty articles, we find no robust evidence suggesting that legislature size has either a positive or a negative effect on government budgets. Yet, the aggregate results mask considerable heterogeneity. Our findings provide moderate support for the ‘law of 1/n’ in unicameral legislatures and in upper houses, but they also indicate that studies using panel/fixed-effects models or regression-discontinuity designs report negative public spending estimates. We find only limited evidence that electoral systems impact public spending, which suggests that proportional representation systems may not be more prone to overspending than majoritarian ones.

This paper studies the implications of distortions in intertemporal margins for the conduct of climate policy. We do so by introducing a framework that combines a standard two-period overlapping generations (OLG) model with a tractable model of household heterogeneity, in which over-accumulation of capital arises from uninsurable idiosyncratic labor income risk. We illustrate that market-based climate policies must be adjusted when the government cannot provide full insurance to households by taxing only capital and is constrained to transfer resources across generations for risk-sharing. In a numerical exercise, we find that idiosyncratic risk leads to an optimal capital income tax rate of 35 per cent and a carbon price 7.5 per cent lower than its first best.

A proposal to reform the United Kingdom's excise duty on alcohol is under consideration during 2022. The proposal would change the tax base from volume of product to volume of alcohol, which would see a fall in the tax on sparkling wine (by about one-fifth), a rise in the tax on fortified wines of 18% alcohol by volume (ABV) (by about one-sixth), and table wines with more (less) than 11.5% ABV would become dearer (cheaper). With taxes on most beers unchanged and taxes on spirits lowered slightly, the pattern of UK wine consumption and imports would alter considerably. This article draws on a global model of national alcoholic beverage markets to estimate the likely bilateral trade effects of this proposed reform to UK excise duties. It compares them with the trade effects of the United Kingdom's first two bilateral free trade agreements (FTAs), following the post-Brexit EU–UK Trade and Cooperation Agreement, which allows Australian and New Zealand vignerons tariff-free access to the UK wine market. Those two FTAs are estimated to cause the United Kingdom to import far more wine than is lost by the proposed changes in UK excise duties.

This paper investigates optimal capital taxation in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the “stepping on toes effect” is smaller, (ii) the “standing on shoulders effect” is stronger, or (iii) the extent of creative destruction is smaller. The optimal capital tax rate is more likely to be positive when there is underinvestment in R&D. Moreover, the optimal capital tax rate and the monopolistic markup exhibit an inverted-U relationship. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 6.6%. Finally, we consider a number of extensions and find that the result of a positive optimal capital tax is robust.

This paper explores Alexis de Tocqueville's thought on fiscal political economy as a forerunner of the modern school of preference falsification and rational irrationality in economic decision making. A good part of the literature has misrepresented Tocqueville as an unconditional optimist regarding the future of fiscal moderation under democracy. Yet, although he initially shared the cautious optimism of most classical economists with respect to taxes under extended suffrage, Tocqueville's view turned more pessimistic in the second volume of his Democracy in America. Universal enfranchisement and democratic governments would lead to higher taxes, more intense income redistribution and government control. Under democracy, the continuous search for unconditional equality would eventually jeopardise liberty and economic growth.

Finding the ways that work to deliver the innovation needed should be given parity of esteem with getting the prices right as a focus of the economics profession and policy systems. Learn from experience as regards carbon pricing and carbon-reducing innovation; insights from the latter coming mainly from the US, China and Europe; demographically relatively small countries – Denmark (wind) and Australia (solar PV) – can make outsize contributions. A carbon price ceiling is too low to drive innovation; generating carbon-reducing innovation requires that it be explicitly recognized as a priority, and nurtured accordingly: identify the priority area(s) where innovation at scale will be necessary to make progress; baseline the elements of the innovation ecosystem which are already in place, and the gaps that need to be filled. Key elements include institutions and incentives that promote innovation, a research and enterprise community that make it happen, and a supportive public.

This paper shows empirical evidence and theory consistent with the US government using debt optimally to adjust the federal budget to news about long-term growth. First, using historical forecasts from the Congressional Budget Office (CBO) since 1984, I find that government purchases and deficits are positively correlated with expectations about long-term productivity, real gross domestic product, and tax revenue growth, whereas tax receipts are negatively correlated. A structural vector autoregression estimated with US quarterly data in 1955–2015 identifies permanent and transitory productivity shocks and points to “trend” shocks as the source of these correlations. Second, I present an open economy real business-cycle model with stochastic productivity trend and optimal public purchases and taxes. Calibrating the model to the US economy, the Ramsey planners' allocation yields moments aligned with those observed in the data.

Taxation is accepted as a fact of modern life, despite recurring political conflict over the nature and direction of fiscal policies. Most financiers regard obligations issued by the state as a safe investment option. Neither taxation nor state obligations were taken for granted during much of the history of public finance, however, at least not before the early 1800s. The ‘tax state’ developed in fits and starts, driven by the exigencies of warfare, which provided the main rationale for raising state income. Although wartime fiscal innovations eventually facilitated the rise of an efficient military state, the options available for implementing such improvements and preferences for specific fiscal or financial instruments varied greatly across early modern states. Focusing on the ‘long’ eighteenth century, this introduction presents a framework for assessing these differences and introduces the other articles in this special issue.

Economic issues will be key determinants of the outcome of the Scottish referendum on independence. Pensions are a key element of the economic case for or against independence. The costs of funding pensions in an independent Scotland would be influenced by mortality risks, the costs of borrowing and the segmentation of costs and risks (i.e. pricing to Scotland's experience rather than pooled across UK experience). We compare the overall costs of providing pensions in an independent Scotland against the resources that are available to cover these costs. Scotland has worse mortality experience than the UK as a whole, and Scottish government debt is likely to attract a liquidity premium relative to UK government debt. An independent Scottish government would have to create a bond market for public debt. The liquidity premium would make pensions cheaper to buy, but taxpayers or the consumers of public services would have to pay the cost.

This paper reviews three UK-based welfare-to-work programmes featuring time-limited financial incentives to leave out-of-work benefits for employment. The policies considered are (i) the Employment Retention and Advancement demonstration, aimed at lone parents and the long-term unemployed; (ii) In-Work Credit, aimed at lone parents on welfare; (iii) Pathways to Work, aimed at recipients of incapacity benefits. I illustrate the difficulties in extrapolating from specific findings to general policy-relevant conclusions. Finally, I depict the challenge facing evaluators in future and point to the directions in which evaluation will need to develop if it is to contribute more fully to policy-relevant evaluation.

Cet article étudie le rôle redistributif d'une assurance sociale exclusive en présence d'un mécanisme d'imposition directe optimale. Les agents sont caractérisés par une productivité individuelle et un risque maladie. La réalisation de ce risque engendre une dépense de santé ainsi qu'une perte de revenu liée à l'arrêt maladie. L'objectif est de déterminer les conditions sous lesquelles une couverture uniforme des soins de santé et un revenu de remplacement individuel sont redistributifs. L'assurance sociale optimale peut-elle être complète ?

Nous analysons une politique environnementale menée de façon unilatérale par un Pays Développé, destinée à lutter contre une pollution globale. Dans un cadre de concurrence internationale, nous étudions les conséquences d'une telle politique sur la répartition géographique des activités de production, sur les émissions globales, et sur la recherche de technologie propre de la part des firmes. Nous montrons principalement que des considérations stratégiques amènent les gouvernements à des politiques laxistes. Ce résultat de dumping écologique est robuste au type de concurrence puisque nous l'obtenons aussi bien pour une concurrence en prix que pour une concurrence en quantités.

L'objet de cet article est de relier les préférences des consommateurs pour les produits verts, les décisions d'investissement dans la recherche et le développement d'une industrie polluante et l'optimalité de la taxation de ses émissions polluantes dans le cadre de jeux en trois étapes entre les régulateurs et les entreprises de deux pays (choix des taxes, course à l'innovation et concurrence sur le marché du bien). Nous mettons en perspective différentes hypothèses sur les préférences des consommateurs (produits vert et standard homogènes ou différenciés) et les stratégies des entreprises (concurrence en quantité ou en prix). Sans développer ces modèles, nous analysons chaque étape des jeux pour conclure sur l'importance du rôle de la conscience écologique des consommateurs dans la détermination de la politique environnementale optimale.

In recent years Western governments have introduced a number of emergency measures in their fight against short run unemployment. In this paper a normative analysis concerning the joint implementation of two such measures is offered, viewing unemployment as involuntary, and taking account of the dissatisfaction cost (lack of the social status that having a job provides) borne by unemployed workers. Attention is paid to the existing trade-off between a policy of wage subsidies to the private sector aimed at stimulating employment and a policy of transfer payments to the unemployed intended to increase their purchasing power. In a simple general equilibrium model with wage rigidity, wage subsidy formulas are derived for two settings of incomes control.

The taxation of income is usually criticized for the efficiency loss that results from distorting the intertemporal consumption decision. This argument is rejected in a world where the return to savings is random. It is shown that a distorting marginal tax on uncertain interest income serves as partial insurance and that this effect outweighs the efficiency loss, if only the first marginal dollar in tax revenue is valued less elastically than the last dollar spent on private consumption. A consumption tax — even one with intertemporally differentiated rates — would not provide insurance under these circumstances. The explicit consideration of uncertainty thus gives support to taxes that allow differentiation between the safe withdrawal of savings and the random return thereon.